MONEYVAL-2012-17_MER_HS_en

COUNCIL CONSEH.
OF F.UHQPE K LBUROK

COMMITTEE OF EXPERTS ON THE

EVALUATION OF ANTI-MONEY

LAUNDERING MEASURES AND THE

FINANCING OF TERRORISM

(MONEYVAL)

MONEYVAL(2012)17

Mutual Evaluation Report

Anti-Money Laundering and Combating the
Financing of Terrorism

THE HOLY SEE

(INCLUDING VATICAN CITY

STATE)

The Holy See (including Vatican City State) is evaluated by MONEYVAL pursuant to Resolution
CM/Res(201 1)5 of the Committee of Ministers of 6 April 201 1. This evaluation was conducted by
MONEYVAL and the report was adopted as a third round mutual evaluation report at its 39 th
Plenary (Strasbourg, 2-6 July 2012).

© [2012] Committee of experts on the evaluation of anti-money laundering measures and the financing of
terrorism (MONEYVAL).

All rights reserved. Reproduction is authorised, provided the source is acknowledged, save where otherwise
stated. For any use for commercial purposes, no part of this publication may be translated, reproduced or
transmitted, in any form or by any means, electronic (CD-Rom, Internet, etc) or mechanical, including
photocopying, recording or any information storage or retrieval system without prior permission in writing
from the MONEYVAL Secretariat, Directorate General of Human Rights and Rule of Law, Council of Europe
(F-67075 Strasbourg or dghl. money val@coe.int ).

TABLE OF CONTENTS

I. PREFACE AND SCOPE OF EVALUATION 5

II. EXECUTIVE SUMMARY 7

III. MUTUAL EVALUATION REPORT 18

1 GENERAL 18

1.1 General Information on the Holy See (Incorporating the Vatican City State) 18

1 .2 General Situation of Money Laundering and Financing of Terrorism 25

1.3 Overview of the Financial Sector and Designated Non-Financial Businesses and
Professions (DNFBP) 28

1.4 Overview of Commercial Laws and Mechanisms Governing Legal Persons and
Arrangements 42

1.5 Overview of Strategy to Prevent Money Laundering and Terrorist Financing 42

2 LEGAL SYSTEM AND RELATED INSTITUTIONAL MEASURES 52

2.1 Criminalisation of Money Laundering (R.l and 2) 52

2.2 Criminalisation of Terrorist Financing (SR.II) 58

2.3 Confiscation, Freezing and Seizing of Proceeds of Crime (R.3) 61

2.4 Freezing of Funds Used for Terrorist Financing (SR.III) 65

2.5 The Financial Intelligence Unit and its functions (R.26) 69

2.6 Law enforcement, prosecution and other competent authorities - the framework for the
investigation and prosecution of offences, and for confiscation and freezing (R.27 and 28) 76

2.7 Cross Border Declaration or Disclosure (SR.IX) 82

3 PREVENTIVE MEASURES - FINANCIAL INSTITUTIONS 89

3.1 Risk of money laundering / financing of terrorism: 89

3.2 Customer due diligence, including enhanced or reduced measures (R.5 to R.8) 90

3.3 Third Parties and Introduced Business (R. 9) 113

3.4 Financial institution secrecy or confidentiality (R.4) 113

3.5 Record Keeping and Wire Transfer Rules (R.10 and SR. VII) 118

3.6 Monitoring of Transactions and Relationships (R.ll and 21) 128

3.7 Suspicious Transaction Reports and Other Reporting (R. 13, 14, 19, 25 and SR.IV) 131

3.8 Internal Controls, Compliance, Audit and Foreign Branches (R.15 and 22) 137

3.9 Shell Banks (R.l 8) 142

3.10 The Supervisory and Oversight System - Competent Authorities and SROs / Role,
Functions, Duties and Powers (Including Sanctions) (R. 23, 29, 17 and 25) 143

3.11 Money or value transfer services (SR.VI) 160

4 PREVENTIVE MEASURES - DESIGNATED NON FINANCIAL BUSINESSES AND
PROFESSIONS 161

4.1 Customer due diligence and record-keeping (R.12) 161

4.2 Suspicious transaction reporting (R. 16) 165

4.3 Regulation, supervision and monitoring (R. 24-25) 167

4.4 Other non-financial businesses and professions/ Modern secure transaction techniques
(R.20) 169

5 LEGAL PERSONS AND ARRANGEMENTS AND NON-PROFIT ORGANISATIONS 169

5.1 Legal persons - Access to beneficial ownership and control information (R.33) 170

5.2 Legal Arrangements - Access to beneficial ownership and control information (R.34) 171

5.3 Non-profit organisations (SR.VIII) 172

6 NATIONAL AND INTERNATIONAL CO-OPERATION 178

6.1 National co-operation and co-ordination (R. 31 & R.32) 178

6.2 The Conventions and United Nations Special Resolutions (R. 35 and SR.I) 180

6.3 Mutual legal assistance (R. 36-38, SR.V) 182

6.4 Extradition (R. 37, 39, SR.V) 186

6.5 Other Forms of International Co-operation (R. 40 and SR.V) 188

7 OTHER ISSUES 193

7.1 Resources and Statistics 193

7.2 Other Relevant AML/CFT Measures or Issues 193

IV. TABLES 194

8 Table 1. Ratings of Compliance with FATF Recommendations 194

9 Table 2: Recommended Action Plan to improve the AML/CFT system 206

10 Table 3: Authorities' Response to the Evaluation 219

V. COMPLIANCE WITH THE 3 rd EU AML/CFT DIRECTIVE 220

VI. LIST OF ACRONYMS AND GLOSSARY OF TERMS USED 236

I. PREFACE AND SCOPE OF EVALUATION

1. On 24 February 2011, His Eminence Cardinal Bertone, Secretary of State, wrote to the Secretary
General of the Council of Europe, requesting that the Holy See (including Vatican City State)
become subject to the evaluation and follow up procedures of MONEYVAL. MONEYVAL is the
Council of Europe's primary monitoring arm in anti-money laundering and countering the
financing of terrorism (AML/CFT). The Committee of Ministers accepted this application on 6
April 2011. The Holy See (including Vatican City State) became fully engaged with
MONEYVAL thereafter and arrangements were made for a MONEYVAL onsite visit in
November 2011.

2. The evaluation of the anti-money laundering and combating the financing of terrorism regime of
the Holy See (including Vatican City State) was based on the Forty Recommendations 2003 and
the Nine Special Recommendations on Terrorist Financing 2001 of the Financial Action Task
Force (FATF) 1 and was prepared using the AML/CFT Methodology 2004 2 . Due to the specific
scope of evaluations carried out by the Committee, this evaluation is complemented by coverage
of some issues linked to the Directive 2005/60/EC of the European Parliament and of the Council
of 26 October 2005 on the prevention of the use of the financial system for the purpose of money
laundering and terrorist financing (hereinafter the "Third EU Directive") and Directive
2006/70/EC (the "implementing Directive"). This is in accordance with MONEYVAL's terms of
reference and Procedural rules.

3. The evaluation was based on the laws, regulations and other materials supplied by the Holy See
(including Vatican City State), and information obtained by the evaluation team during the
MONEYVAL on-site visits to the Holy See (including Vatican City State) from 20 to 26
November 2011 and 14 to 16 March 2012. This evaluation report takes into account
developments in the two months subsequent to the first on-site visit (i.e. up to 25 January 2012) as
is permitted in FATF and MONEYVAL practice. Under the procedures of MONEYVAL, no
account can be taken in the text of the report, and for rating purposes, of developments after the
25 th January 2012. None-the-less, the HS/VCS has continued to move forward to improve and
modernise its laws and practices since the 25 th January 2012. Important developments since the
25 th January 2012 are referred to by updating footnotes in accordance with MONEYVAL
procedure.

4. During the MONEYVAL on-site visits, the evaluation team was greeted by His Holiness Pope
Benedict XVI and met with officials and representatives of all relevant Holy See (including
Vatican City State) government agencies and the related organisations. A list of the persons and
bodies met is set out in Annex I to the mutual evaluation report.

5. This is an evaluation of a unique jurisdiction. The evaluation team had first to establish what areas
in the context of the HS/VCS had relevance in AML/CFT terms. Thereafter the 2004 AML/CFT
Methodology has been applied in exactly the same way as any other jurisdiction. This report is an
evaluation of measures in place to counter money laundering and terrorist financing. It is not an
investigation into past or present allegations of money laundering and terrorist financing. It is not
concerned directly with the situation before the implementation of AML/CFT legislation. The
assessment is also not an audit of any particular financial institution, as this is outside the scope of
an evaluation. However, the evaluators have assessed intensively effective implementation of the
global standards (in particular by the Institute for Works of Religion - IOR). MONEYVAL's

1 This report is not based on the revised FATF Recommendations, which were issued in February 2012.

2 As updated in February 2009.

assessment in this area was based on interviews with IOR management and employees and other
documents requested by the evaluation team.

6. The evaluation was conducted by an assessment team, which consisted of MONEYVAL and
FATF experts in criminal law, law enforcement and regulatory issues: Professor William C.
Gilmore (Professor of International Criminal Law at the University of Edinburgh and Legal
Scientific Expert to MONEYVAL) who participated as a legal evaluator; Mr. Philipp Roeser
(Executive Officer, Legal and International Affairs, Financial Market Authority, Liechtenstein)
and Mr. Andrew Strijker, (Financial Scientific Expert to MONEYVAL) who participated as
financial examiners; Mr. Boudewijn Verhelst, (Deputy Director of CTIF-CFI, Belgium and Law
Enforcement Scientific Expert to MONEYVAL) and Mr. Vladimir Nechaev (Assistant to the First
Vice-Chairman of the Government of the Russian Federation and Chairman of MONEYVAL)
who participated as law enforcement evaluators; Mr John Ringguth, (Executive Secretary to
MONEYVAL) and Mr John Baker (MONEYVAL Secretariat). The team reviewed the
institutional framework, the relevant AML/CFT Laws, regulations, guidelines and other
requirements, and the regulatory and other systems in place to deter money laundering (ML) and
the financing of terrorism (FT) through financial institutions and Designated Non-Financial
Businesses and Professions (DNFBP), as well as examining the capacity, the implementation and
the effectiveness of all these systems.

7. This report therefore provides a summary of the AML/CFT measures in place in the Holy See
(including Vatican City State) as at the date of the first MONEYVAL on-site visit or, as noted
above, immediately thereafter. It describes and analyses these measures, and provides
recommendations on how certain aspects of the systems could be strengthened (see Table 2).
It also sets out the Holy See's (including Vatican City State) levels of compliance with the FATF
40 + 9 Recommendations (see Table 1). Compliance or non-compliance with the EC Directives
has not been considered in the ratings in Table 1 .

8. For ease of comprehension a detailed list of acronyms and glossary of terms used in this report is
provided in Section VI below.

II. EXECUTIVE SUMMARY

Background and scope of the evaluation

1. On 24 February 2011, His Eminence Cardinal Bertone, Secretary of State, wrote to the
Secretary General of the Council of Europe, requesting that the Holy See (including Vatican
City State) (HS/VCS) become subject to the evaluation and follow up procedures of
MONEYVAL. MONEYVAL is the Council of Europe's primary monitoring arm in anti-
money laundering and countering the financing of terrorism (AML/CFT). The Committee of
Ministers accepted this application on 6 April 2011. The Holy See (including Vatican City
State) became fully engaged with MONEYVAL thereafter and arrangements were made for a
MONEYVAL on-site visit in November 201 1.

2. MONEYVAL is a peer evaluation mechanism. It assesses the compliance with and the
effectiveness of the implementation of the legal framework, plus the financial and law
enforcement measures in place to combat money laundering and terrorist financing. Its
assessments are made against the global standards of the Financial Action Task Force
(FATF), and also in respect of some aspects of Directive 2005/60/EC (the 3 rd EU Directive).
MONEYVAL is a leading Associate Member of the FATF.

3. This report describes and analyses the AML/CFT measures that were in place in the HS/VCS
at the time of the first MONEYVAL on-site visit (20-26 November 2011) and takes into
account developments in the subsequent two months to 25 January 2012 (as is permitted in
FATF and MONEYVAL practice). A second MONEYVAL on-site visit was made between
14-16 March 2012 to clarify certain matters. The MONEYVAL report offers
recommendations on how to strengthen aspects of the system. It was prepared on the basis of
the FATF 40 Recommendations (2003) and the 9 Special Recommendations of the FATF on
Terrorist Financing (2001), as updated. It is not based on the revised FATF
Recommendations, which were issued in February 2012.

4. Under the procedures of MONEYVAL, no account can be taken in the text of the report, and
for rating purposes, of developments after the 25 th January 2012. None-the-less, the HS/VCS
has continued to move forward to improve and modernise its laws and practices since the 25 th
January 2012. Important developments since the 25 th January 2012 are referred to by
updating footnotes in the body of the mutual evaluation report in accordance with
MONEYVAL procedure.

5. This report is an evaluation of measures in place to counter money laundering and terrorist
financing. It is not an investigation into past or present allegations of money laundering and
terrorist financing. It is not concerned directly with the situation before the implementation of
AML/CFT legislation. The assessment is also not an audit of any particular financial
institution, as this is outside the scope of an evaluation. However, the evaluators have
assessed intensively effective implementation of the global standards (in particular by the
Institute for Works of Religion - IOR). MONEYVAL' s assessment in this area was based on
interviews with IOR management and employees, the analysis of comprehensive internal
procedures and other documents requested by the evaluation team.

The specific context of the evaluation

6. The Vatican City State is geographically and demographic ally the smallest country in the
world and consequently there is very little domestically generated crime. However, St Peter's
Basilica and the Vatican Museums receive more than 18 million pilgrims and tourists each
year and this inevitably results in a certain level of petty crime.

7. No independent businesses are established within the HS/VCS, as a public monopoly regime
exists in the economic, financial and professional sectors. Thus, unlike other states evaluated

by MONEYVAL, there is no market economy. Given this, the authorities consider that the
threat of money laundering and terrorist financing is very low. However, no formal risk
assessment has been done as yet. The evaluators consider that such a risk assessment should
be undertaken to properly judge the adequacy of this approach, and a process has been
initiated to commence one. This is important as the evaluators have identified factors present
in the system which could potentially increase the AML/CFT risk situation including: high
volumes of cash transactions and wire transfers (although, the evaluators fully appreciate that
cash transactions are an important contributor to the funding of the global mission of the
church); global spread of financial activities (including with countries that insufficiently
apply the FATF Recommendations); and the limited availability of information on the non-
profit organisations operating in the HS/VCS.

8. There are only two entities, the Institute for Works of Religion (IOR) and the Administration
of the Patrimony of the Holy See (APSA), which have been treated as financial institutions
for the purposes of this evaluation. The IOR is the larger of the two financial institutions with
33,404 accounts being operated as at 30 November 2011. Both financial institutions are
ultimately controlled by the HS/VCS.

9. There are only a few (foreign domiciled) designated non-financial businesses and professions
(DNFBP), notably external accountants, providing relevant services within the HS/VCS.

Key findings

10. The HS/VCS authorities have come a long way in a very short period of time and many of
the building blocks of an AML/CFT regime are now formally in place. But further important
issues still need addressing in order to demonstrate that a fully effective regime has been
instituted in practice.

11. In order to bring the legal system of the HS/VCS into line with international standards on
AML/CFT matters the Act of the Vatican City State No. CXXVII, concerning the prevention
and countering of the laundering of proceeds resulting from criminal activities and financing
of terrorism, was enacted on 30th December 2010 and came into force on 1 April 2011. By
an Apostolic letter of 30 December 2010, in the form of a 'Motu Proprio/ 7 His Holiness
Pope Benedict XVI also extended this law to the Holy See itself and created the Autorita di
Informazione Finanzaria (Financial Intelligence Authority (FIA)) as the financial intelligence
unit (FIU) for the HS/VCS and AML/CFT supervisor. This original AML/CFT Law was
rapidly revised after the first MONEYVAL visit, largely to take into account the evaluators'
emerging findings. The first law was wholly supplanted and replaced by Decree No. CLIX of
25 January 2012 making amendments and additions, all of which came into force also on 25
January 2012. The Decree has since been confirmed. The revised AML/CFT Law introduced
a significant number of necessary and welcome changes, but due to the timing of its
introduction it was not possible for the evaluators to assess the effectiveness of
implementation. The amended AML/CFT Law also clearly establishes the Secretariat of
State as responsible for the definition of the policies on AML/CFT, and for adhesion to
international treaties and agreements.

12. Money laundering has been fully criminalised in accordance with the FATF standards
although effectiveness of application has yet to be demonstrated as there have been no
investigations, prosecutions or convictions for money laundering. Likewise, financing of
terrorism has been criminalised, although the specific criminalisation of financing in respect
of certain terrorist acts in relevant UN counter-terrorism conventions is absent. The
authorities have the necessary powers to freeze, seize and confiscate criminal funds and assets
although effectiveness of implementation has also still to be demonstrated. Detailed
legislative provisions have been introduced to give full force and effect to the freezing of
funds associated with terrorism and financing of terrorism in accordance with relevant UN

3

A document issued by the Pope on his own initiative directed to the Roman Catholic Church.

Security Council Resolutions (UNSCRs). However, as of January 2012, they had not been
brought into practical effect 4 .

13. The VCS has an established Gendarmerie whose responsibilities now include the
investigation of financial crime and money laundering offences, though there does not appear
to have been enough training provided to them in financial investigation. Both the
Gendarmerie and the FIA appear to have adequate legal and material resources.

14. The preventive measures established by the original AML/CFT Law provided a
comprehensive framework, including Customer Due Diligence (CDD) 5 and record keeping
requirements. These represented a major step forward for the HS/VCS. The legal provisions
were augmented by Regulations and Instructions issued by the FIA. However, some elements
of the original preventive regime did not clearly meet the FATF standards. The amendments
and additions made by the revised AML/CFT Law have filled a considerable number of gaps
identified in the original AML/CFT Law. The gaps that remain relate mainly to the
requirements for appropriate monitoring and scrutiny of business relationships and
transactions and the implementation of the risk based approach established by the Law.

15. The IOR launched a process in November 2010 (in advance of the enactment of AML/CFT
legislation) to review its client database. The IOR is committed to complete this process with
up to date CDD information by the end of 2012, though this was still at an early stage at the
time of the on-site visits. Though there is an IOR bylaw that sets out the categories of persons
that may hold accounts in IOR, it is recommended that serious consideration be given to a
statutory provision describing the categories of legal and natural persons who are eligible to
maintain accounts in the IOR.

16. The AML/CFT Law introduced a suspicious transaction reporting regime and the FIA have
issued guidance on indicators of anomalous transactions. But attempted transactions are not
clearly covered by the requirements and there are deficiencies in the reporting provisions
regarding terrorist financing. In the period under review 2 STRs had been filed under the
AML/CFT regime by a financial institution. This appears to be low as the SAR regime has
been in effect since 1 April 2011. Even if allowances are made for the small size of the
financial sector in the HS/VCS and for the need of the reporting entities to accustom
themselves to the new regime and acquire experience, effectiveness of the reporting system is
questionable.

17. The FIA is the main supervisor for AML/CFT purposes. Nonetheless, there appeared to be a
lack of clarity about the role, responsibility, authority, powers and independence of the FIA
as supervisor. The legislative basis for supervision and inspection needs strengthening to
ensure that it includes the review of policies, procedures, books and records and, above all,
sample testing. The supervisory authorities should have the clear legal right of entry into
premises under supervision and the right to demand access to books of account and other
information. The FIA does not appear to have adequate powers to carry out its supervisory
duties and has no ability to issue sanctions in respect of one of the two identified financial
institutions (APSA) as APSA is regarded as a "public authority". Following its formation, the
FIA concentrated on preparing and issuing guidance. At the time of the MONEYVAL on-site
visits the FIA had not conducted an on-site inspection, notwithstanding the fact that the

4

On 3 April 2012 the HS/VCS list of designated persons was promulgated by the Secretariat of State which
covered, inter alia, the 1267 list of designated persons. On the same day the FIA issued an Ordinance giving
effect to this list and transmitted it to all obliged persons.

5 Customer Due Diligence is a cornerstone of a preventive AML/CFT regime. It requires that all customers are
clearly identified and that their identity is verified against reliable documentation. This includes the
identification and verification of the natural person(s) who ultimately owns or controls a customer and/or the
person on whose behalf a transaction is being conducted and those persons who exercise ultimate effective
control over a legal person or legal arrangement (such as trusts).

primary financial institution, the IOR, had requested that the FIA do so. No specific training
had been provided to the FIA for its supervisory tasks.

18. The FIA is not involved in the process of licensing of senior staff in the financial institutions
and there is no provision for the financial institutions to be prudentially supervised. It is
strongly recommended that IOR is also supervised by a prudential supervisor in the near
future. Even if this is not formally required it poses large risks to the stability of the small
financial sector of HS/VCS if IOR is not independently supervised.

19. The AML/CFT Law covers lawyers and accountants who are operating within the VCS for
STR reporting purposes. There are a number of non-profit organisations (NPO) based within
the HS/VCS, all of which are linked to the mission of the Church. However, there is no
supervisory regime in place in the NPO sector and no systemic outreach on AML/CFT issues
has taken place as yet to the NPO sector.

20. Overall there are adequate arrangements in place to facilitate both national and international
cooperation. In January 2012 the HS/VCS became a party to the Vienna, Palermo and
Terrorist Financing Conventions of the United Nations which the evaluators warmly
welcome as this will facilitate judicial mutual legal assistance. While information provided to
the evaluators showed a broadly satisfactory track record in judicial international co-
operation, one country indicated that it had encountered some difficulties in mutual legal
assistance relationships with the HS/VCS.

21. The FIA is limited in its ability to exchange information with other FIUs by the requirement
to have a Memorandum of Understanding (MOU) in place with its counterparts. As no
MOUs had been signed at the time of the MONEYVAL on-site visits, the effectiveness of the
FIU in international co-operation was not demonstrated 6 . The FIA does not have the explicit
authority to share supervisory information.

4. Legal Systems and Related Institutional Measures

22. With regard to criminal law, the HS/VCS relies upon the Italian Penal Code of 1889 and the
Italian Code of Criminal Procedure of 1913. It is, however, noted that the AML/CFT Law
has introduced various updating amendments to the Penal Code to bring HS/VCS
criminalised offences into line with the FATF "designated categories of offences" 7 .

23. Prior to the enactment of the original AML/CFT Law, money laundering had not been
specifically criminalised in the legal system of the HS/VCS. Before the AML/CFT Law came
into force there was reliance on Art. 421 of the Italian Criminal Code of 1889. Subsequent to
the MONEYVAL on-site visit of November 2011 and in the light of MONEYVAL' s
emerging findings, the authorities of the HS/VCS revisited the original AML/CFT Law in
order to deal with identified gaps and also as they described it - to place the AML/CFT
system on a more secure, long term and sustainable legislative footing. Extensive
amendments and additions to the law brought about by this process came into force on 25
January 2012. Under this revised AML/CFT Law, the physical and material elements of
money laundering required by the international standards are covered.

24. The offence of money laundering in the HS/VCS applies to natural persons who knowingly
engage in proscribed activities. The evaluators were told that under applicable general
principles and rules of the legal system the intentional element of the offence can be inferred
from objective factual circumstances. A provision on "administrative responsibility of legal
persons" was introduced into the amended legislation which came into force on 25 January

' The authorities have subsequently reported that they have entered into one MoU with an FIU. In addition they
have approached 1 1 other FIUs receiving formal assent from two.

7 The offences which are required to be criminalised in order that they can form an underlying basis for money
laundering charges and prosecutions.

10

2012. The application of administrative responsibility of legal persons is based upon the prior
securing of a criminal conviction of a natural person with relevant ties to the legal person in
question for either money laundering or the financing of terrorism. The evaluators have
concerns regarding the effectiveness of the corporate liability provision.

25. Specific offences to cover the financing of terrorism have also been included in the
legislation. However, the ability to prosecute the financing of terrorism in respect of certain
terrorist acts in some relevant UN counter-terrorism conventions is still missing. The
financing of individual terrorists or terrorist organisations for legitimate purposes, which is
also required under FATF standards, is not covered.

26. The AML/CFT Law provides for the mandatory confiscation of both proceeds and
instrumentalities, including from third parties. Provisional measures, including the freezing
and/or seizing of property, to prevent any dealing, transfer or disposal of property subject to
confiscation are applied through reliance on the provisions of the Italian Criminal Code. The
evaluators are satisfied that law enforcement agencies and the FIA have adequate powers to
identify and trace property that is or may become subject to confiscation or is suspected of
being the proceeds of crime. The system of confiscation and of provisional measures contains
wording designed to protect the interests of bona fide third parties, as the standards require.

27. The AML/CFT Law has introduced provisions to allow for the freezing of funds of persons
identified under the UNSCRs. However, a system for the application of these provisions in
practice had still to be developed at the time of the MONEYVAL visits 8 .

28. The Financial Intelligence Unit for the HS/VCS, is the FIA. It has been operational since 1
April 2011. The Motu Proprio establishing the FIA identifies the FIA as a public institution
of the HS. Its jurisdiction in respect of AML/CFT rules extends to all Dicasteries
(Departments) of the Roman Curia and all the organisations and bodies depending on the
Holy See that perform financial activities listed in the AML/CFT Law.

29. The FIA is an autonomous administrative authority. It exercises the key FIU functions of
receiving and analysing suspicious activity reports (SARs), and of disseminating the results
of its analysis to law enforcement. In support of its analytical activity the FIA has a broad
power to collect additional data. The AML/CFT Law gives the FIA access, on a timely basis,
to the necessary financial, administrative, investigative information and also additional
information from the parties that made the disclosure. However, as a result of a regrettable
shift between the texts of the original and the revised AML/CFT Law, the legal basis for the
FIA enabling it to collect additional information from all entities that are subject to the
reporting obligation has become uncertain. The AML/CFT Law guarantees the FIA's
operational independence and autonomy and requires that the FIA shall have adequate
resources.

30. Whilst the FIA is required to maintain the "highest secrecy", exchange of information in the
context of international co-operation or with the judicial authorities is allowed. However, the
FIA does not have the authority to autonomously conclude MOUs with its foreign
counterparts which potentially limits its effectiveness in international cooperation. The FIA is
seriously considering joining the Egmont Group 9 and has already taken steps to initiate the
membership procedure which would enable it to co-operate directly with other FIUs in the
Egmont Group in accordance with Egmont principles.

8 See footnote 4 above.

9 The Egmont Group provides a forum for FIUs around the world to improve cooperation in the fight against
money laundering and financing of terrorism. Egmont Group members meet regularly to find ways to cooperate,
especially in the areas of information exchange, training and the sharing of expertise.

11

31. The judicial power in the HS/VCS is exercised by the Courts, i.e. the Single Judge, the
Tribunal, the Court of Appeal and the Court of Cassation. The law enforcement authorities in
the HS/VCS are comprised of: the Public Prosecutor's Office (the Promoter of Justice), who
is nominated by the Pope; the Gendarmerie Corps, whose primary functions, as the only
police force in the VCS, are the maintenance of public order and the investigation of
offences. Due to the small size of the law enforcement community, there are no law
enforcement authorities specialised in investigation and prosecution of ML or TF. The
judiciary and law enforcement authorities have not yet been confronted with money
laundering or terrorism financing matters, so it is not possible to assess their effectiveness on
these issues.

32. The standards require that countries should have measures in place to detect the physical
cross-border transportation of currency or bearer negotiable instruments. With the adoption
of the AML/CFT Law the HS/VCS authorities established a declaration system for cash and
bearer negotiable instruments with legal requirements for all natural persons. However, the
declaration requirement does not cover shipment of currency through containerised cargo.
The Gendarmerie Corps have the authority to make inquiries and inspections to ensure
compliance with the requirements as well as to restrain currency where there is a suspicion of
ML/FT. Although the authorities have the power to apply a penalty this is limited and there
are doubts as to the ability of the Gendarmerie in practice to restrain currency where there is
a suspicion of ML/FT on a timely basis, given that all declarations had been made at financial
institutions. The Gendarmerie can co-operate with the Customs authorities of other countries,
although there appear to be restrictions on the ability of the FIA to exchange information
with counterparts on cross-border transportation.

Preventive Measures - Financial Institutions

33. The preventive measures established by the AML/CFT Law prior to the amendments made
by Decree No. CLIX of 25 January 2012 provided a comprehensive framework, including
CDD and record keeping requirements and were viewed as a major step forward for the
HS/VCS. The legal provisions had been augmented by Regulations and Instructions issued
by the FIA. However, some elements of the preventive regime did not clearly meet the FATF
standards. The amendments and additions promulgated by Decree No. CLIX of 25 January
2012 have filled a considerable number of gaps identified in the previous Law. The gaps that
remain relate mainly to the requirements for the monitoring and scrutiny of business
relationships and transactions and the implementation of the risk based approach established
by the Law.

34. The original AML/CFT Law as amended by Decree No. CLIX of 25 January 2012 applies to
all activities and operations carried out by financial institutions as defined in the Glossary to
the FATF Methodology. In practice, there are only two entities, notably the IOR and APSA,
which have been treated as financial institutions for the purposes of this evaluation. The IOR
is the most relevant to this assessment.

35. The revised AML/CFT Law introduced a comprehensive CDD regime and includes a risk-
based approach to CDD. Enhanced CDD 10 is required by law for relationships established
with politically exposed persons (PEPs), correspondent current accounts and non-face to face
relationships. Some deficiencies have been identified with respect to these requirements. For
example, the requirement to put in place appropriate risk management systems to determine
whether a customer is a PEP does not extend to beneficial owners of accounts. With respect
to non-face to face relationships the Law provides for undue exemptions from the full CDD
requirements. The only additional requirement for enhanced due diligence, that appears to be

10 Enhanced CDD measures are required to be applied to certain high risk categories of customers (for example,
non-resident customers). These procedures require seeking additional information concerning the background to
the customers and their beneficial owners.

12

designed based on a local risk assessment, is set out in an FIA Instruction and relates to
repeated deposits of cash or valuables.

36. The instances for simplified CDD 11 as provided for in the AML/CFT Law are not the result
of a specific assessment of the risks and vulnerabilities faced by the HS/VCS. The failure to
have undertaken any formal risk assessment implies that there is no basis for determining
whether other potential risks are addressed appropriately. As noted earlier, the evaluators
have identified additional factors that could increase the risk situation. The evaluators'
assessment on these specific risks largely matches with a preliminary threat assessment of the
FIA. This preliminary assessment needs completing and formalising.

37. In applying the risk-based approach to simplified due diligence the AML/CFT Law creates
blanket exemptions from the CDD requirements. As such these are not "reduced or
simplified" CDD measures as the standards allow, but exemptions from any CDD
requirements except in those situations when ML or FT are suspected, or when there are
reasons to believe that the previous verification is unreliable or insufficient to provide the
necessary information. These exemptions need reviewing.

38. The CDD framework also lacks an express requirement to verify that the transactions are
consistent with the institution's knowledge of the source of funds. There is also no
requirement to give special attention or to examine the background of business relationships
and transactions with persons from or in countries that do not or insufficiently apply the
FATF Recommendations. Nor are there requirements to examine the background and
purpose of complex, unusual large transactions, or unusual patterns of transactions, that have
no apparent or visible economic or lawful purpose, as the standards also require.

39. The IOR officials demonstrated clear commitment and high awareness as regards the
accurate implementation of the obligations under the AML/CFT Law. The evaluators were
pleased to note that the internal procedures established by the IOR went, to some extent,
beyond the requirements set out by the Law prior to the amendments and additions
introduced in January 2012. Their procedures partly contained requirements that were
missing or unclear in the original AML/CFT Law.

40. On the other hand, based on these internal procedures, the evaluators have also identified
some deficiencies impacting on the effective implementation of certain CDD measures. For
example, the risk categorisation applied by the IOR does not take into account geographic
risk, product/service risk, type and frequency of transactions, the activity carried out,
business volumes, or behaviour of the client.

41. As a result of the incomplete risk categorisation by the IOR, enhanced due diligence
measures appear to be applied to a very limited number of customer categories and the
additional measures applied in higher risk situations seem limited. The IT systems to identify
unusual and riskier transactions were still in the process of being developed at the time of the
MONEYVAL on-site visits. Additionally, some weaknesses were detected in the
identification procedures (e.g. with regard to persons purporting to act on behalf of a
customer).

42. The APSA representatives demonstrated a good understanding of their obligations under the
AML/CFT Law and the requirements appear to be implemented in practice. However, the
formalisation of CDD procedures in APSA appears to be at an early stage. Internal
procedures in APSA were only adopted after the first MONEYVAL on-site visit.

43. A major concern arises from the fact that there has never been a sample testing of the CDD
files maintained by the IOR or a supervisory assessment by the FIA including the scrutiny of

11 Simplified CDD measures can be applied to certain categories of low risk customers (for example,
government institutions or enterprises). This allows institutions to apply reduced measures to identify and verify
the identity of the customers and their beneficial owners.

13

transactions and the origin of funds in transactions carried out by the IOR. While the
evaluators took note of the efforts and commitment by the IOR to review its customer
database in the light of the new regulatory framework, this process was still at an early stage
at the time of the MONEYVAL on-site visits. Though there is an IOR bylaw that sets out the
categories of persons that may hold accounts in IOR, the evaluators recommend that serious
consideration be given to a statutory provision setting out the categories of legal and natural
persons that may hold accounts in the IOR.

44. The AML/CFT Law has introduced a requirement to preserve the documents and records in
accordance with the standards. With regard to wire transfers, the FIA has issued Regulations
that also appear to be generally in line with the standards. However, there is no explicit
requirement in the Regulation that ensures that non-routine transactions are not batched 12 ,
where this would increase the risk of money laundering. The Regulation itself contains
weaknesses regarding the verification of identity and too broad an interpretation of the
concept of 'domestic transfers'. Furthermore, no requirements for beneficiary financial
institutions to adopt effective risk-based procedures for identifying and handling wire
transfers that are not accompanied by complete originator information have been put in place.

45. The AML/CFT Law has introduced a suspicious transaction reporting regime which is
basically sound and the FIA have issued guidance on indicators of anomalous transactions.
However, attempted transactions are not clearly covered by the requirements. The reporting
requirements refer to "transactions" rather than "funds" and there is no reporting obligation
covering funds suspected to be linked or related to, or to be used for terrorism, terrorist acts
or by terrorist organisations. Furthermore, the deficiencies in the terrorist financing offence
formally limit the terrorist financing reporting obligation. The level of STRs at the time of
the on-site visits raises questions in the minds of the evaluators regarding the effectiveness of
the reporting regime in practice. It is noted that no reports were submitted to the prosecutor.
The protection for persons reporting a suspicious transaction and the "tipping off prohibition
are largely in line with the standards.

46. The FIA has issued guidance on required internal controls in financial institutions. There are,
however, concerns that the scope of the FIA's right to issue guidance is restricted. Neither the
law nor guidance provide for timely access by the AML/CFT compliance officer to customer
identification data and other CDD information, transaction records, and other relevant
information. While neither of the financial institutions operates any foreign branches or
subsidiaries, relevant provisions have been established in the AML/CFT Law to cover this,
which are largely in line with the standards.

47. The FIA is the main supervisor for AML/CFT purposes. The AML/CFT Law states that the
FIA has the power to perform inspections and to impose administrative pecuniary sanctions.
The Law does, however, limit supervision to monitoring and verification of certain activities,
which focus mainly on internal control measures and selection of employees. Furthermore, it
is unclear to what extent the power to carry out inspections includes the review of policies,
procedures, books and records, and can be extended to sample testing. It is also unclear
whether the FIA's powers include the right of entry into the premises of the institution under
supervision, the right to demand books of accounts and other information and the right to
make and take copies of documents, with a penalty on the institution if its officers fail to
comply. Following its formation, the FIA concentrated on preparing and issuing Regulations
and Instructions. As a consequence of this virtually no supervisory activity took place during
the period under review and, at the time of the MONEYVAL on-site visits, the FIA had not
conducted an on-site inspection. It is recommended that the definition in the AML/CFT Law
of supervision and inspection be amended to make it clear that those functions are not
restricted only to certain AML/CFT activities but encompass all aspects of AML/CFT, and in

12 Batch processing groups similar transactions together to facilitate efficient data processing. The standards
require that non-routine transactions should be processed individually.

14

particular the review of policies, procedures, books and records and sample testing. The
supervisory authorities should have the legal right of entry into premises under supervision
and the right to demand access to books of account and other information.

48. It is strongly recommended that IOR is also supervised by a prudential supervisor in the near
future as currently there is no adequate, independent supervision of the IOR. Even if this is
not formally required, it poses large risks to the stability of the small financial sector of
HS/VCS if IOR is not independently supervised. In addition it would require IOR to
implement additional regulatory and supervisory measures which are relevant for AML.

49. No sanctions for breaches of AML/CFT legislation are applicable to APSA as it is regarded
as a public authority. This should be reconsidered. Otherwise, legal persons can be
sanctioned. There are sanctions available also in respect of all natural persons, but directors
and senior management are not specifically addressed in the legislation. Further clarity here
would help. There is no power to withdraw, restrict or suspend a financial institution's
licence. At the time of the MONEYVAL on-site visits, no sanctions had been applied. With
regard to market entry, directors and senior management of IOR and APSA are not
specifically evaluated on the basis of "fit and proper" criteria by the FIA and the financial
institutions are "licensed" via the Chirograph 13 and the Pastor Bonus 14 but not by the FIA.

50. The AML/CFT Law states that financial secrecy should not obstruct requests for information
by competent authorities and also provides for domestic authorities to actively co-operate and
exchange information for AML/CFT purposes. The Law further states that official secrecy
shall not inhibit the international exchange of information. HS/VCS authorities have
demonstrated that information covered by financial and official secrecy is exchanged in
practice. However, the Law lacks express exemptions from the secrecy provisions for certain
types of information exchange.

Preventive Measures - Designated Non-Financial Businesses and Professions (DNFBP)

51. Given the public monopoly regime, no one is entitled to establish businesses or to set up
industrial or commercial enterprises without obtaining authorisation from the Governor. No
such authorisation has ever been issued. Only those DNFBP services provided by HS/VCS
entities, as well as cross-border services provided by foreign domiciled persons (e.g. lawyers,
auditors, etc.), are permitted to be conducted within the HS/VCS.

52. The revised AML/CFT Law covers all categories of DNFBP covered by the FATF standards
except for casinos (including internet casinos) the establishment of which is expressly
prohibited by the Law. DNFBP have to comply with the same obligations as financial
institutions, including inter alia CDD and record keeping requirements. Despite this broad
scope of application, there appear to be only a few (foreign domiciled) DNFBP (notably
external accountants) providing services within the HS/VCS that are relevant under the
FATF standards. However, those DNFBP have not yet implemented the obligations of the
AML/CFT Law.

Non-Profit organisations

53. There are a number of non-profit organisations based within the HS/VCS. They are all linked
to the support of the mission of the Church. This sector is a significant controller of financial
resources within the HS/VCS. No review has been undertaken of this sector to establish the
adequacy of the legal and regulatory framework and the potential vulnerabilities to financing
of terrorist activities. At the time of MONEYVAL' s visits there was no monitoring regime in

13 A papal document establishing the IOR.

14 An Apostolic Constitution promulgated by Pope John Paul II which sets out the process of running the central
government of the Roman Catholic Church. Both IOR and APSA are established under Pastor Bonus.

15

place. No written guidance had been prepared and no systemic outreach has taken place to
this sector.

National and International Cooperation

54. Both the Holy See and the Vatican City State enjoy international legal personality. The HS
maintains bilateral diplomatic relations with members of the international community. It is a
member of certain international organisations and has observer status in many others,
including the UN and the Council of Europe. It has a treaty making capacity in international
law and has become a party to a number of multilateral conventions including several
negotiated under the auspices of the UN. The evaluators warmly welcomed the decision of
the HS/VCS to become a party to the Vienna, Palermo and Terrorist Financing Conventions
of the UN in January 2012.

55. In the HS/VCS issues of international legal co-operation are regulated by the relevant
provisions of the Italian Code of Criminal Procedure of 1913 as it stood in 1929 (CCP). The
CCP stipulates that international conventions and practices regarding letters rogatory and
related matters are to be observed. However, at the time of the first MONEYVAL on-site
visit, no bilateral mutual legal assistance agreements had been concluded. However, since the
HS/VCS is now a party to the Vienna, Palermo and Terrorist Financing Conventions of the
UN, their extensive provisions relating to mutual legal assistance now apply as between the
HS/VCS and all other state parties.

56. At present the HS/VCS relies on the Letters Rogatory process provided for in the CCP. This
is drafted in relatively broad and flexible terms and double criminality is not required. This
scheme of co-operation is generally adequate in relation to the provision of assistance for
money laundering, terrorist financing and predicate offence investigations and prosecutions.
With regard to extradition, two separate regimes operate. With regard to Italy, under the
terms of the Lateran Treaty, the HS/VCS enjoys "an enhanced co-operation". With regard to
other states the terms of the CCP apply. This means that when a request for extradition is
made through diplomatic channels the courts play a decisive role in determining whether the
relevant requirements have been satisfied. The final determination is made by the executive
branch of government.

57. While information provided to the evaluators showed a broadly satisfactory track record in
international co-operation injudicial mutual legal assistance, one country indicated that it had
encountered some difficulties in the context of its mutual legal assistance relationship with
the HS/VCS.

58. The legal systems of the HS/VCS do not contain any undue restrictions to law enforcement
co-operation in fiscal matters. The legal system of the HS-VCS does not contain any
particular restrictions or conditions on international co-operation on the basis of the
protection of financial secrecy and professional privilege of possible designated non-financial
subjects. Competent authorities have powers to carry out inquiries on both the internal and
international levels. In particular, the Gendarmerie, in close co-operation with the Judicial
Authority, carries out inquiries and investigations and cooperates with authorities of other
states within the framework of INTERPOL. It can request, through the competent channels,
the co-operation of the equivalent Italian agencies. However, as noted, the FIA is limited in
its ability to exchange information by the requirement to have an MOU in place with its
counterparts and no MOUs had been signed at the time of the visits 15 . The evaluators were
provided with conflicting opinions regarding the ability of the FIA to share information prior
to the entry into force of the original AML/CFT Law on 1 April 2011. It was subsequently
demonstrated to the evaluators that in practice this did not appear to restrict the ability of the

15 The authorities have subsequently reported that they have entered into one MoU with an FIU. In addition they
have approached 1 1 other FIUs receiving formal assent from two.

16

FIA to receive or disseminate information relating to transactions prior to 1 April 2011. The
FIA does not have the explicit authority to share supervisory information

9. Resources and Statistics

59. Both the FIA and the Gendarmerie appear to have adequate budgets to carry out their
functions and the AML/CFT Law requires that FIA shall have adequate resources. At the
time of the MONEYVAL visits, neither the FIA nor the Gendarmerie had yet developed
adequate experience of the application of the AML/CFT law. The evaluators noted that the
Gendarmerie lacked training and experience in financial investigation and thus there is a
reserve on their future effectiveness in this area. The FIA staff had not received any specific
training for its supervisory tasks, and this needs to be remedied.

60. The authorities were able to provide statistics on the level of crime in the HS/VCS and
related criminal proceedings. The recent introduction of the AML/CFT Law meant that there
were as yet relatively few statistics maintained, although a system for recording and
analysing STRs was in place. Statistics were also provided on international co-operation.

10. Conclusion

61. Most states in MONEYVAL have had AML/CFT systems in place for 10-15 years and been
through 3 evaluation rounds. The HS/VCS have therefore come a long way in a very short
period of time and many of the building blocks of an AML/CFT regime are now formally in
place. However, further important issues still need addressing in order to demonstrate that a
fully effective regime has been instituted, particularly in respect of supervision of the
financial institutions to ensure that the CDD measures are being effectively implemented and
also in respect of the exchange of information by the FIA.

62. The HS/VCS authorities have co-operated closely with the evaluators and reacted quickly to
remedy a number of the deficiencies highlighted during the first on-site visit.

63. The development of the HS/VCS AML/CFT regime is an on-going process. MONEYVAL
will continue to monitor progress closely through its comprehensive follow-up procedures.

17

III. MUTUAL EVALUATION REPORT
1 GENERAL

1.1 General Information on the Holy See (Incorporating the Vatican City State)

The Vatican City State and the Holy See

1. Although the Holy See (HS) is not a state in itself, it has sovereignty over the Vatican City State
(VCS) which is the smallest sovereign state in the world, in terms of both size and population. It
is a landlocked sovereign city-state whose territory consists of a walled enclave within the city of
Rome, Italy. It has an area of approximately 44 hectares (110 acres) on the Vatican hill close to
the western bank of the River Tiber. At the time of the MONEYVAL on-site visits, it had a
resident population of 595 of which 247 were resident citizens. The HS/VCS jurisdiction also
covers some extraterritorial areas, including various buildings owned by the HS/VCS, both within
and outside Rome. However, the VCS receives on average 18 million pilgrims and tourists per
year.

2. Citizenship of the VCS is determined neither by blood (ius sanguinis) nor by birth (ius soli).
Instead, it is determined on the basis of ius officii, meaning that citizenship can be obtained
generally only through appointment to work in a specific capacity in the service of the Holy See.
Due to its dependence on employment within the HS, citizenship is lost upon the termination of
such employment. Law no. CXXXI of 2011 on citizenship, residency and access, further extends
citizenship to the citizen's direct family members who live with and are authorised to reside in
Vatican City State. At the time of the first MONEYVAL on-site visit, the VCS had 595 citizens,
out of which 348 citizens live outside the territory of the State 16 .

3. The term the Holy See (or Apostolic See) refers, stricto sensu, to the Roman Pontiff as a legal
person distinct from that of other legal persons established according to the Canon law (See
Canons 113 and 361, 1983 Code of Canon Law (CCL)).

4. While the term Holy See or Apostolic See refers to the Roman Pontiff (the Pope), it also, unless
the contrary is clear from the nature of things or from the context, refers to the Roman Curia,
which is the complex of Dicasteries and institutions which help the Pope in the exercise of his
Supreme Pastoral Office. It thus strengthens the unity of the faith and the communion of the
people of God and promotes the religious mission of the Catholic Church in the world (See
Canons 360-361 CCL; and Art. 1 of the Apostolic Constitution of June 28, 1988: "Pastor
Bonus"). The Holy See is the preeminent episcopal see of the Catholic Church, forming the
central government of the Church. As such, diplomatically, the Holy See acts and speaks for the
whole Catholic Church. It is also recognised by other subjects of international law as a sovereign
entity, headed by the Pope, with which diplomatic relations can be maintained.

5. Although it is often referred to as "the Vatican", the Holy See is not the same entity as the Vatican
City State, which came into existence only in 1929. The Holy See, the episcopal see of Rome,
dates back to the beginning of Christian times. Ambassadors are officially accredited not to the
Vatican City State but to "the Holy See", and papal representatives to states and international
organisations are recognised as representing the Holy See, not the Vatican City State. The
expression "the Holy See" (without further specification) is normally used in international

16

As of March 20, 2012, 109 Nuncios (VCS citizens) were living outside the VCS.

18

relations to refer to the See of Rome viewed as the central government of the Roman Catholic
Church.

6. It is important to note that the civil activity of the local Churches (Dioceses), outside of the
immediate jurisdiction of the Vatican City State, is subject to the legal system of the countries
where they are located, and that, according to the CCL, it is for the Bishop: "to exercise careful
vigilance over the administration of all the goods which belong to public legal persons subject to
him" (See Can. 1276,1) although the HS exercises some degree of surveillance over the use of
goods of canonical legal persons. Moreover, as clarified by the Pontifical Council for the
Interpretation of Legislative Texts, the Dicastery of the Roman Curia competent for authentic
interpretation of laws and regulations (See Art. 154, Pastor Bonus), the HS: "is not the owner of
the goods, is not required to respond for the consequences of acts of economic management posed
by the immediate administrator of the assets".

Scope of Mutual Evaluation Report

7. In the context of this report the evaluators have limited themselves to those activities and entities
that legally fall within the direct jurisdiction of the Vatican City State and the Holy See. As stated
in the previous paragraph, the local Churches (Dioceses), outside the immediate jurisdiction of the
Vatican City State, would be expected to be subject to the law and regulations relating to money
laundering and the financing of terrorism of the jurisdiction in which they are based and do not,
therefore, fall to be considered in this assessment.

History

8. As the imperial Roman capital and the burial place of the apostles Peter and Paul, Rome was
established as the seat of the Christian faith in the 1st century AD. During the intervening years
the Catholic Church attained control over various territories on the Italian peninsula and around
Avignon, France. These territories were known as the Papal States and were under the sovereign
rule of the Pope.

9. Territories around Avignon were permanently surrendered to France under the Treaty of
Tolentino in 1797. In 1861, the unification of the various city states on the Italian peninsula gave
rise to a political conflict between Italy and the papacy. The dispute is generally known as "the
Roman Question", and concerned the legal and political status of the Pope and the Catholic
Church. The first Italian Parliament declared Rome the capital city on 27 March 1861. In 1870,
however, Napoleon III was forced to withdraw the garrison due to the commencement of the
Franco-Prussian war. This gave the Italian Army the opportunity to occupy Rome in the same
year. Following the capture of Rome, the Popes considered themselves "prisoners in the Vatican",
as they refused to leave the Vatican compound.

10. The Roman Question was resolved in 1929 with the signing of the Lateran Treaty (see Annex
VII) between the Italian Government and the Holy See.

The Lateran Treaty

1 1 . The Lateran Treaty recognised the international legal personality of the Holy See (Art. 2) and
provided for the creation of the Vatican City State (Art. 3) as a means of ensuring the absolute
sovereignty of the Holy See. It was signed on 1 1 February 1929 and ratified on 7 June 1929.

12. Besides the reestablishment of a territorial sovereignty, through the foundation of the VCS (Arts.
3-4), the Lateran Treaty provides for a series of further immunities. Such guarantees take on a
particular relevance with respect to the definition of the legal status of the HS in Italy. They can
have a functional, personal and real nature.

13. The guarantees that are relevant to the person of the Roman Pontiff are the same that are
established for sovereigns and Heads of State to whom a special protection against the criminal
jurisdiction of third States is granted. In this regard, the Lateran Treaty establishes that "Italy,
considering the person of the Supreme Pontiff sacred and inviolable, declares that any attempt on
him and the provocation to commit it are punishable by the same penalties established for any

19

attempt on the person of the King [now the President of the Republic] and the provocation to
commit it". (Art. 8).

14. Among the guarantees having a functional nature, it is noted:

(a) the pontifical dignitaries and officers are exempted from any personal duty (for example:
military service, juror's office, etc.; See Art. 10, §1);

(b) the clerics participating for any reasons of office whatsoever, outside the VCS and, hence
also in Italy, in the issuing of deeds by the HS, are exempted from any impediment,
inquiry and control (See Art. 10, §3);

(c) cardinals and bishops, also if they are foreign nationals, enjoy the freedom of entry and
transit in the Italian territory, as well as full personal liberty, in particular during the
vacancy of the Apostolic See and on the occasion of Conclaves and Councils (See Arts.
12, §3; 21, §§2; and 4).

15. There are also guarantees, having a functional nature, intended to assure the free exercise of the
HS's sovereignty and jurisdiction. For example, according to the Lateran Treaty: "the central
bodies" of the HS are exempted from any interference on the part of the Italian State (Art. II) 17 .
This provision essentially reproduces the rule of international law on the exemption of foreign
States from local civil, administrative and criminal jurisdiction.

16. Some immunities have a real nature. Considering the narrow boundaries of the VCS, some
Dicasteries of the HS are located in the territory of Italy. According to the Lateran Treaty, the
areas and property in which the Dicasteries are placed have the same immunities enjoyed by
diplomatic embassies (See Arts. 13-15).

17. According to Art. 7 of the Italian Constitution of 1948, the review and modification of the Lateran
Treaty do not require proceedings of constitutional review.

Political structure

18. As noted above, when considering the political structure of the HS/VCS, it is recalled that the
Holy See and the Vatican City State are, in fact, two separate legal entities although the VCS is
functionally dependent on the HS. The following diagram reflects the structural arrangements in
both of these entities.

17 For example, according to the Italian Court of Cassation (case No. 3932/1987), the IOR, in the
exercise of its institutional activity, is a "Central Body".

20

ROMAN PONTIFF

HOLY SEE

VATICAN
CITY STATE

PRESIDENT AND
MEMBERS OF
PONTIFICAL
COMMISSION

GOVERNORATE

TRIBUNALS

ROMAN
CURIA

SECRETARIAT
OF STATE

CONGREGATIONS

PONTIFICAL
COUNCILS

CONNECTED
INSTITUTIONS

APOSTOLIC
TRIBUNALS

OTHER
ORGANISMS

CARDINALS
COMMISSION*

IOR

SUPERVISORY
COUNCIL

GENERAL

DIRECTION

*For further details of the role of the Cardinals Commission see under section 1.3 below.
Vatican City State

19. The HS/VCS is an elective monarchy, the structure of which is governed by the Fundamental Law
of the Vatican City State of 2000 (the "Fundamental Law") (See Annex X). The status of the VCS
was affirmed to the evaluators during the first MONEYVAL on-site visit by the Cardinal
Secretary of State, Cardinal Bertone, who stated that the VCS was "established as a guarantee of
the visual independence and spiritual liberty of the Holy See so that it may carry out its religious
and moral mission" 18 .

20. The Fundamental Law contains various provisions which define the nature and character of the
HS/VCS. According to Art. 1 the Pope (Supreme Pontiff) has "full legislative, executive and
judicial powers." In practice, however, the Pope usually delegates these absolute powers to
various entities within the HS/VCS. During a period of a vacant See (i.e. in the absence of a Pope)
the powers are vested in the College of Cardinals. The College may issue legislative provisions if
urgently required, but the effect of these provisions is limited to the duration of the vacancy
unless they are subsequently approved by the Pope.

21. The Pontifical Commission of the Vatican City State exercises the legislative powers of the Pope
except for those cases which the Supreme Pontiff intends to reserve to himself or to other entities.
It is composed of a Cardinal President and other Cardinals, all named by the Supreme Pontiff for
a five-year term. (Fundamental Law, Art. 3.1). The President of the Pontifical Commission is
also, ex officio, the President of the Governorate of Vatican City State.

22. The executive power of the Pope within the territory of the VCS is exercised by the President of
the Governorate of the VCS, who represents the VCS in legal (but not international) affairs. The
President has the authority to issue temporary legislative provisions which remain in force for 90
days only, unless confirmed by the Pontifical Commission (Fundamental Law, Art. 7). The
President can also issue orders for the implementation of Acts and Regulations within the territory

Address of His Eminence Cardinal Tarcisio Bertone, Secretary of State, to the evaluation team on 22
November 2011.

21

of the VCS. The functions of the Governorate are distributed among various departments,
including:

State Accounting Administration,

General Services Administration,

Security and Civil Protection Services Department (including the Gendarmerie),

Department of Health and Hygiene,

Museums Administration,

Department of Technical Services,

Department of Telecommunications,

Department of Economic Services,

Department of Pontifical Villas, and

Vatican Observatory.

23. Matters of greater importance are dealt with together with the Secretariat of State (Fundamental
Law, Art. 6). The Fundamental Law sets out the relationship between the VCS and the Roman
Curia. Before they can become law, bills must be submitted to the Pope for consideration via the
Secretariat of State (Art. 4. §3 of the Fundamental Law). The VCS' budget and final balance must
also be submitted to the Pope via the Secretariat of State once they have been approved by the
Commission Art. 12).

24. An advisory body of the state is made up of the General Councillor and State Councillors. These
entities perform advisory functions in relation to legislation and administration of the VCS.

25. On the basis of the information obtained by the evaluation team on the MONEYVAL on-site
visits, it is apparent that the Governorate exercises the functions which are absolutely necessary to
ensure the proper functioning of the VCS.

The Holy See

26. According to the HS/VCS authorities, the HS refers to the Pope as an independent moral person
distinct from the other entities established under Canon law. In a broader sense, the HS refers to
the Roman Curia, which is the administrative body of the Roman Catholic Church. It comprises
various departments ("Dicasteries") and institutions, which assist the Pope in the exercise of his
office. According to the authorities, the Dicasteries are:

the Secretariat of State;

Congregations;

Tribunals;

Pontifical Councils; and

Administrative Services:

o The Apostolic Camera;

o The Administration of the Patrimony of the Apostolic See (APS A); and

o The Prefecture for the Economic Affairs of the Holy See.

27. The Dicasteries rank equally among themselves. Nevertheless, the Secretariat of State has been
assigned a broad coordinating and directing role. The competences of the Dicasteries are
stipulated in the Apostolic Constitution (Pastor Bonus) (see Annex VIII), the constitutional
document of the Roman Curia.

22

International relations

28. The HS is a longstanding member of the international community having full legal personality
under international law. It has the capacity to conclude treaties (ius tractandi) and to conduct its
own policy abroad (ius legationis). This capacity is exercised by the Secretariat of State in the
name of the Pope, both on behalf of the HS (cf. Pastor bonus, Arts. 41, 45-46) and on behalf of
the VCS (Fundamental Law, Art. 2). The HS has established diplomatic relations with 179 States
and most international and regional organisations. To maintain these relations, the HS appoints
diplomatic representatives, who usually have the rank of Apostolic Nuncios, and other diplomatic
personnel.

29. The HS is entitled to sign bilateral and multilateral treaties with States, other regional or
international organisations, as well as a range of other international subjects. Within the
framework of an international organisation, the HS can be either Member or Observer. In general,
as an Observer state, the HS is entitled to participate in the activities of the organisation but lacks
the right to vote.

30. The HS enjoys the usual immunities recognised by customary international law. As noted, the
Lateran Treaty also provides the HS with various functional, personal and real immunities in its
relations with Italy. The Pope enjoys the same protection of the Italian criminal law as does the
Italian Head of State (Art. 8). Cardinals and bishops enjoy the freedom of entry and transit in Italy
regardless of their nationality, and pontifical officers are exempt from military service, jury
service and any other obligation of a personal nature (Art. 10). The central bodies of the HS are
exempt from any interference on the part of the Italian state (Art. 11). Furthermore, Art. 20 of the
Lateran Treaty provides that goods arriving from abroad and destined for Vatican City or destined
for institutions or offices of the Holy See outside its boundaries, will always be admitted from any
point of the Italian frontier and in any seaport of Italy for transit through Italian territory, with full
exemption from customs fees and duty.

Courts and Tribunals

31. Both the Holy See and Vatican City State operate a system of tribunals in order to consider both
civil and criminal matters. For further details see section 1.5 below.

Police force

32. In the HS/VCS, two distinct entities perform police and security functions. The Pontifical Swiss
Guard is a department of the HS and is responsible for ensuring the security of the Pope. It has
jurisdiction over the Apostolic Palace and all the entry points to the VCS. The Corps of
Gendarmerie of the Vatican City State is responsible for performing all the ordinary functions of a
police force in the VCS. It is responsible, inter alia, for public security, criminal investigations,
border control. For further details see section 1.5 below.

Economy

33. As far as the economic and financial system is concerned, Act No. V on the Economic,
Commercial and Professional Order of 1929 19 (see Annex XXX), established a public "monopoly
regime" in the economic, financial and professional sectors in force in the State. As such, there is
no private property or private business within the VCS. Apart from two public legal entities,
APSA and the Institute for Works of Religion (IOR) there are no other financial institutions as
defined by the FATF methodology.

34. While little economic activity takes place in the VCS, the state generates some revenue by issuing
postal stamps and charging museum entrance fees. Since the signing of the Monetary Agreement
between the European Union and the Vatican City State on 17 December 2009, the VCS utilises
the Euro as its official currency and is entitled to issue a set number of coins each year.

19 A.A.S. Suppl. 1 (1929), No. 1, June 8, 1929, pp. 25-28.

23

35. The Prefecture for the Economic Affairs:

•

studies the reports on the patrimonial and economic status of the Holy See as well as the
statements of income and expenditure of the previous year inspecting, if necessary, the books
and documents;

• compiles the Holy See's consolidated financial statement of the previous year's expenditures;
and

• prepares the estimates for the following year's expenditures (Pastor Bonus, Art. 178).

The balance assets of the VCS are partly transferred to the HS, while the liabilities mostly refer to
services rendered by the VCS to the HS.

36. As stated by the authorities in their replies to the MEQ, the consolidated accounts of the HS, for
the year to 31 December 2010, showed revenues equal to €245,195,561 and expenditures which
amount to €235,347,437, with a surplus of €9,848,124. The IOR contributed approximately
€55,000,000. Peter's Pence, which comprises the contributions to the Pope's charitable works
from churches, foundations, individual believers as well as the Institutes of Consecrated Life and
Societies of Apostolic Life, amounted to US$67,704,416 in the year 2010. Expenditures mostly
account for ordinary and extraordinary expenditures by the Dicasteries and Institutions of the
Roman Curia. On 31 December 2010, the HS employed a total of 2,806 personnel.

37. In relation to the VCS, the budget of the Governorate provides for the management of the
territory, institutions and facilities, as well as the performance of activities supporting the HS. The
authorities advised the evaluation team that, on the final balance sheet of 2010, revenues amount
to €255,890,112 and expenditures to €234,847,011 with a surplus of €21,043,000. On 31
December 2010, the Governorate employed a total of 1,876 personnel. The Governorate operates
independently from the Roman Curia, as its administration is able autonomously to cater for its
economic needs.

Hierarchy of laws

38. According to Act No. on Sources of Law of 2008 (see Annex XII), the Canonical legal system is
the supreme source of law and the first point of reference for statutory interpretation. It consists of
the Code of Canon Law, the uncodified Canon law, and the special Canon law. The Code of
Canon Law is the codified representation of church theology in legal language. After the Canon
law, the main sources (as defined by Art. 1, para 2 of the Act above) are the Fundamental Law
(which only the Supreme Pontiff can amend), as well as any Acts promulgated by the Pope, the
Pontifical Commission, or by any other entity authorised by the Pope. Furthermore, Art. 3
provides for various additional sources such as the Criminal Code and the Code of Criminal
Procedure.

39. As provided by Art. 3.1 of the Act on Sources of Law, Italian law is applied where there are
regulatory gaps or where it is impossible to apply the domestic law. By explicit decision
expressed from time to time by a competent VCS authority, Italian law is also applied
("received") when no provision is made by domestic law. Art. 4 reserves certain matters to Canon
law, including marriage, citizenship and adoption.

40. With regard to criminal law, the VCS relies upon the Italian Penal Code of 22 November 1888
and the Italian Code of Criminal Procedure of 27 February 1913. It is, however, noted that the
revised AML/CFT Law (Act of the Vatican City State No. CXXVII, concerning the prevention
and countering of the laundering of proceeds resulting from criminal activities and financing of
terrorism, 30 th December 2010 revised and replaced by Decree No. CLIX promulgating
amendments and additions to Law No. CXXVII, On the Prevention and countering of the
laundering of the proceeds of criminal activities and the financing of terrorism, of 30 December
2010 of 25 January 2012) has introduced various updating amendments to the Penal Code to bring
HS/VCS criminalised offences into line with the FATF designated categories of offences (i.e.
those minimum categories of offences which have to be criminalised within the national

24

legislation and which can be predicate or underlying offences for the offence of money
laundering).

41. With regard to civil law, the VCS relies upon the Italian Civil Code of 16 March 1942, as it had
been amended by the Italian legislature up to 1st January 2009 (Act on the Sources of law, Art. 4).

42. The Act on Sources of Law also recognises the rules provided for by the Canon Law as the
primary source of law and the main interpretation criterion within the HS/VCS framework (Art.
1). Hence, according to the abovementioned Law (Arts. 3 and 4), the Italian Civil Code (dated
March 16, 1942) is applicable only in cases where its provisions are not inconsistent with the
Code of Canon law, the Lateran Treaty and following Agreements, taking into account the
exemptions under Art. 4 of Law no. LXXI on Sources of Law (e.g., Vatican citizenship, marriage,
adoption, prescription related to ecclesiastical goods, employment relationships, pious
dispositions and pious foundations).

43. Acts and regulations of the VCS are published in the Supplement to the Acta Apostolicae Sedis
(Acts of the Apostolic See). They enter into force on the seventh day following publication unless
otherwise expressly stated.

1.2 General Situation of Money Laundering and Financing of Terrorism

44. According to the statistics provided in a Report of the Promoter of Justice of the Vatican City
State 20 for the Opening of the Judicial Year 2010, proceedings in which VCS citizens or
inhabitants are involved, are rare. On the criminal side, they do not even account for one percent.
In the Vatican (and in particular inside Saint Peter's Basilica and the Vatican Museums) each year
there are more than 18 million pilgrims and tourists, who account for some of the crime
committed. Moreover, the Vatican, though being an enclave inside the City of Rome, has direct
relationships all over the world; for this reason procedures started in the VCS are usually
characterised by "international" elements (e.g. parties domiciled abroad, contracts executed or to
be executed abroad). Hence, there is a frequent necessity for international forms of judicial
assistance.

45. Among the 1,126 civil proceedings pending in 2010 in the VCS, most concerned contracts.

46. Of the criminal proceedings pursued (see table below), over eighty per cent involved property
offences, of which the majority concerned theft (most frequently robbery in the Vatican Museums
and the Saint Peter's Basilica), but proceedings for embezzlement and fraud were also
commenced. Criminal proceedings for offences to the person - particularly assault and battery -
have also been brought, including one case in 2009 of assault on the Pope. In 2007, one case of
possession and trafficking of narcotics was prosecuted. Thirty percent of criminal proceedings
involved imposition of fines. Overall, in excess of ninety percent of reported crime concerned
tourists and visitors rather than VCS residents or HS/VCS staff.

47. The following chart provides details of all criminal procedures in Vatican City State for the period
2007 to 2011.

20 The appointee of the Pope who exercises prosecutorial functions.

25

Judicial Year

From 1 October to 30 September

2007

2008

2009

2010

2011

Gendarmerie

Complaints submitted to the Single
Judge

27

17

11

13

10

Complaints submitted to the
Promoter of Justice

115

71

57

48

64

Single Judge

Complaints received from the
Gendarmerie

27

17

11

13

10

Complaints received from the
Promoter of Justice for reasons of
competence

-

1

2

3

4

Complaints transferred to the
Promoter of Justice for reasons of
competence

9

10

7

4

4

Sentences

2

-

3

4

4

Cases archived

16

7

4

5

7

Promoter of Justice

Complaints received from the
Gendarmerie

115

71

57

48

64

Complaints received from the Single
Judge for reasons of competence

9

10

7

4

4

Complaints transferred to the Single
Judge for reasons of competence

-

1

2

3

4

Request made to the Investigative
Judge

86

69

52

33

47

Summary instructions

13

13

16

16

11

Cases referred to trial

3

1

-

2

2

Investigation Judge

Requests from the Promoter of
Justice

86

69

52

33

47

Cases archived

86

69

52

33

47

Sentences

2

-

-

-

-

Criminal Tribunal

Trial Proceedings held

7

4

3

4

1

Sentences Issued

4

1

2

2

-

48. At the time of the MONEYVAL on-site visits there had been no prosecutions under the
AML/CFT Law although it should be noted that this law had only been in effect since 1 April
2011. Given the economic situation of the VCS, with no independent businesses operating within
the VCS, the authorities consider that the threat of money laundering and terrorist financing is
very low; although no formal risk assessment has been undertaken.

26

49. In order to bring the legal system of the HS/VCS into line with international standards on
AML/CFT matters the Act of the Vatican City State No. CXXVII, concerning the prevention and
countering of the laundering of proceeds resulting from criminal activities and financing of
terrorism, was enacted on 30th December 2010. The Act was introduced by a Motu Proprio of
His Holiness Pope Benedict XVI and in the introduction the Act was extended to the Holy See
itself. The Act inter alia established the Autorita di Informazione Finanzaria (Financial
Intelligence Authority (FIA)) as the FIU for the HS/VCS. The original law was brought into force
on 1 April 2011. Since that date the FIA has been created and is now operational. Following the
first MONEYVAL on-site visit and the team's emerging findings, the HS/VCS authorities
responded very swiftly to address numerous issues. The original AML/CFT Law was
subsequently revised, wholly supplanted and replaced by Decree No. CLIX of 25 January 2012
promulgating amendments and additions to Law no. CXXVII, On the Prevention and countering
of the laundering of the proceeds of criminal activities and the financing of terrorism, of 30
December 2010 of 25 January 2012. A significant package of subordinate measures (in the form
of Regulations and Instructions from the FIA) was subsequently prepared and brought into force
on 15 December 2011. These measures were intended to further develop the law and fill gaps on
the preventive side. They include indicators of anomalies for the identification of suspicious
transactions and internal control procedures. These Regulations and Instructions have not been
replaced since Decree No. CLIX of 25 January 2012. The HS/VCS authorities advised that under
Decree No. CLIX of 25 January 2012, they remain in force in so far as they are compatible with
the revised AML/CFT Law. The evaluators consider that the Regulations and Instructions
constitute "other enforceable means". The reasons for this are set out under the review of SR.VII
in Section 3.5 below. The new law applies also to the Holy See as the Motu Proprio of His
Holiness Pope Benedict XVI applied the law "and its future modifications" to the Holy See. The
internal procedures drawn up by the IOR and APSA are not considered to be "other enforceable
means" but are taken into account when assessing the effective implementation of the FATF
standards.

Transparency, good governance and measures against corruption

50. Art. 1 of Apostolic Constitution Pastor Bonus states that the Roman Curia is the complex of
dicasteries and institutes which help the Roman Pontiff in the exercise of his Supreme Pastoral
Office for the good and service of the whole Church and of the particular Churches. It thus
strengthens the unity of the faith and the communion of the people of God and promotes the
mission proper to the Church in the world. Thus the overall function of the VCS is to support the
Pope in his universal mission. As such high standards are expected of all persons involved, in
particular, the General Regulation of the Roman Curia of 1999 requires a high standard, both moral
and professional regarding hiring staff and maintenance. In particular, Art. 14 provides that
executives shall be chosen 'among those distinguished for virtue, prudence, knowledge, due
experience'.

51. As noted under section 1.2 above, criminal proceedings in which VCS citizens or inhabitants are
involved are rare.

52. With regard to corruption, although there have been recent unsubstantiated allegations of
corruption in the media, there is no empirical evidence of corruption taking place within the VCS.

53. With respect to the prevention of corruption, Arts. 171-174 of the Criminal Code punish both the
public officers as well as persons who induce public officers to receive funds. Art. 174 of the
Criminal Code provides that those who either fail to comply with, or omit performance of their
public duties in exchange for undue favours are punishable. Moreover, Art. 174 provides
expressly for the confiscation of the funds used to induce corrupt acts. In addition, the General
Regulation of the Roman Curia, as well as the General Regulation of the State of Vatican City,
each provide administrative sanctions, including termination of employment, for any conduct
recognisable under the Penal Code as corruption. Furthermore, the APSA, which reviews and
authorises both employment of persons and authorisations to enter into procurement contracts for

27

the Roman Curia, has, since 2010, adopted specific regulations and procedures with respect to
public procurement and contracts with a view: to ensure greater transparency; to uncover corrupt
activities; and to prevent the involvement of criminal activity in the procurement of public
services and works. According to the new procedures, in order to participate in the procurement
of public service and works, candidates must provide relevant judicial information. Moreover,
companies must provide information regarding their nature, activities, organisation, organs of
administration, direction and control. Finally, the Code of Canon law, contains provisions
requiring proper conduct and honesty in office.

54. A system of criminal investigation and prosecution has been well established and is described
below. More recently, the HS/VCS authorities have taken a number of steps to embrace the
international standards for the detection and prevention of money laundering and the financing of
terrorism through the passing of an AML/CFT Law and the formation of a FIU. As the original
AML/CFT Law only came into force on 1 April 2011 it was not possible for the evaluators to
form a view on the long-term assimilation of an AML/CFT culture with the HS/VCS. It was,
however, noted that the two "financial institutions" (IOR and APSA) visited by the evaluators
appeared to be fully aware of their AML/CFT responsibilities and to have embraced an
AML/CFT culture. Furthermore the two financial institutions have taken the initiative to review
their systems and controls and introduce a numbers of preventive measures including the
identification and verification of identity of all account holders.

55. With regard to transparency, the investigative powers of the FIA and Gendarmerie are set out in
sections 2.5 and 2.6 below and both the FIA and Gendarmerie appear to have access to relevant
documents, books and records. As set out in section 5.1 below the VCS has created what is
virtually a public monopoly regime and, as such, there are no independent legal persons registered
in the VCS. There are a number of NPOs established within the VCS and details of these are set
out in section 5.3 below. The VCS maintains three separate registers for canonical legal persons,
Vatican civil legal persons and volunteer organisations.

1.3 Overview of the Financial Sector and Designated Non-Financial Businesses and

Professions (DNFBP)

56. The evaluation team was informed by the FIA, that after it became operational on 1 April 2011, it
evaluated the activities of the entities located in VCS or connected to the HS in order to assess,
whether they have to be considered subjects of the AML/CFT Law. As a starting point for their
evaluation, FIA relied on the reference in the Motu Proprio of His Holiness Pope Benedict XVI,
which establishes that the AML/CFT Law applies to all Dicasteries of the Roman Curia and for
each and every dependent institution or entity in which they carry out activities falling under the
scope of the AML/CFT Law.

57. The FIA informed the evaluation team that their assessment as to whether an entity was to be
considered as an obliged subject under the AML/CFT Law has been carried out on the basis of the
following criteria:

• the performance of activities listed in Art. 2 § 1 , letters a) to r) of the AML/ACT Act (prior to
the amendments promulgated by Decree No. CLIX of 25 January 2012) on a professional
basis; and

• the exercise of these activities in respect of third parties, such as clients or counterparts.

58. Based on this assessment the FIA came to the conclusion that at the time of the MONEYVAL on-
site visits only two entities have to be considered as obliged subjects under the AML/CFT Law,
namely the IOR and APSA. The FIA engages in ongoing assessment as to the applicability of Art.
2 of the AML/CFT Law to other entities within the HS/VCS.

28

59. Given the large number of entities operating within HS/VS the evaluation team had to rely to a
large extent on the above-mentioned assessment carried out by FIA when identifying entities
relevant for the MONEYVAL evaluation. In addition the evaluators have analysed the
information provided by the authorities on some of the entities evaluated by the FIA and met with
the IOR, APSA, the Pontifical Council "Cor Unum" and the Equestrian order of the Holy
Sepulchre. In accordance with FIA's assessment, the evaluators also identified the IOR and APSA
to be relevant to this evaluation. In addition, accountants have been identified as DNFBP relevant
to this assessment. All other entities would appear to fall under the FATF definition of non-profit
organisations 21 .

Financial Sector

I. Institute for Works of Religion - IOR

History of the IOR

60. The Institute for Works of Religion ("Istituto per le Opere di Religione" , (IOR)) was constituted
by Chirograph of 27 June 1942 by Pope Pius XII in the Vatican City. The newly-established IOR
absorbed the former Administration of the Works of Religion ("Amministrazione delle Opere di
Religione", (AOR)), which had originated in the Commission for Pious Causes ("Commissione ad
pias causas") established by Pope Leo XIII on 11 February 1887.

61. The AOR was initially a type of central administration for the Pope's remaining assets after the
loss of the Papal States.

62. On 27 July 1942, Pope Pius XII renamed the AOR as the IOR and by a further Chirograph of 24
January 1944 he turned the Institute into an independent financial institution. He also established
new rules to regulate the Institute, requesting that the Institute's own Cardinals' Commission
propose changes to the By-laws of March 17, 1944 that appeared necessary in order to execute the
1944 Chirograph.

63. The Chirograph of Pope John Paul II on 1 March 1990 (see Annex XXV) gave a new
configuration to the IOR "in order to render the structures and the activities of the Institute more
adequate to the needs of the times, in particular, by relying upon the collaboration and the
responsibility of competent lay Catholics". The name and the purpose were retained.

Purpose of the Institute

64. The purpose of the Institute is determined in Art. 1 of the Chirograph of March 1990 (see also
Art. 2 (first sentence) of the IOR By-Laws (See Annex XXVI):

The purpose of the Institute is to provide for the custody and the administration of moveable
and immovable property transferred or entrusted to the Institute by natural or legal persons
and destined {" destinati" ) for religious works or charity.

65. In addition, Art. 2 (second sentence) of the IOR By-Laws sets out:

The Institute therefore accepts assets whose destination, at least partial or future, is indicated
by the preceding paragraph. The Institute can accept deposits of assets from entities or
persons of the Holy See and of the State of Vatican City.

66. Based on these provisions, the IOR commits to establish relationships only with a restricted group
of customers. The eligible types of clients are now set out in the IOR "Prevention and Countering
of the Laundering and Proceeds from Criminal Activities and the Financing of Terrorism Policy"
(Annex XXVII; hereinafter referred to as "IOR Internal AML/CFT Policy") which was
introduced on 25 February 2011 and subsequently approved on 6 October 2011. In accordance

21 The term non-profit organisation or NPO refers to a legal entity or organisation that primarily engages in
raising or disbursing funds for purposes such as charitable, religious, cultural, educational, social or fraternal
purposes, or for the carrying out of other types of "good works".

29

with the IOR Internal AML/CFT Policy the IOR can operate only with the strictly defined types
of customers which are set out in Attachment 1 to the AML/CFT Policy; further details are set out
under Customer Structure below.

67. While it is evident that deposits of assets from entities of the Holy See and of the Vatican City
State are destined for religious works or charity and therefore meet the above-mentioned
requirement, this appears less clear in the case of Holy See employees who can hold a payroll
account with the IOR or deposits held by foreign ambassadors to the Holy See.

68. IOR representatives pointed out that the activity performed by Holy See employees is linked to
the institutional role and functions carried out by the HS/VCS entities and their employees, whose
work serve either directly or derivatively the universal mission of the Holy See, a mission
supported by the work of both the Roman Curia and the Vatican City State and its offices. This
view is also taken with respect to the ambassadors accredited to the Holy See.

Legal Status

69. The IOR is characterised in the legal commentary as an "atypical" institution because it combines
a peculiar set of qualities and activities that do not fit easily into any one category. Its
fundamental features are as follows: it is a foundation established as a canonically recognised
separate juridical person created by the sovereign to serve the purposes set out for it by the
sovereign. The IOR is situated exclusively on the sovereign territory of the VCS.

70. HS/VCS representatives stress that the IOR is a public institution whose nature is public and
activity is iure imperii (by virtue of its sovereignty), but which also conducts activities
comparable with that of a financial institution, which are iure gestionis (commercial or private
acts) in character. An analysis of the activities of the IOR is set out under paragraph 88_below. In
the view of the evaluators, the IOR conducts as a business one or more of the activities or
operations for or on behalf of a customer as listed under the definition of "financial institution" in
the glossary to the FATF 3 rd round Methodology.

7 1 . Due to its legal nature both Italian 22 and US courts 23 have recognised its sovereign immunity from
civil suit or criminal prosecution. However, IOR representatives stress that the IOR is not to be
considered absolutely immune. Based on the theory of restrictive immunity, exemptions may
apply in cases of tort, expropriation or primarily commercial activity.

72. The IOR is not answerable to the Prefecture of Economic Affairs of the Holy See. Instead it
functions independently.

Internal organisation of the IOR

73. The organs of the Institute are:

a. The Cardinals' Commission;

b. The Prelate;

c. The Oversight Council;

22

Italian Supreme Court of Cassation, Section V, 17 July 1987, n.3932 (acknowledging location of IOR on
Vatican City State territory; its formation under the laws of the Holy See and the Vatican City State; and its
immunity from the jurisdiction of Italian courts)

23 Alperin v. Istituto per le Opere di Religione (erroneously sued sub nom. "Vatican Bank"), No. C-99-04941
MMC, 2007 WL 4570674, at *3-6 (N.D. Cal. Dec. 27, 2007) (holding, upon factual inquiry, that the Istituto per
le Opere di Religione (IOR) qualifies as a foreign sovereign entity entitled to restrictive immunity pursuant to
the United States Foreign Sovereign Immunities Act (Title 28 section 1602-1611) because, inter alia, it is (1) a
separate legal entity; (2) formed under the laws of the sovereign; (3) created to serve pursue a public purpose;
(4) and not a "commercial enterprise"); decision affirmed by United States Court of Appeals for the Ninth
Circuit, 365 Fed. Appx. 74 (9th Cir. Feb. 10, 2010) (plaintiffs' request for panel rehearing and rehearing en banc
denied, Feb. 10, 2010).

30

d. The Directorate;

e. The Auditors.

74. At the time of the MONEYVAL on-site visits, and in accordance with the Chirograph of 1 March
1990, the IOR operated a three-tier board structure. The highest board level is formed by the
Cardinals' Commission, which consists of five high-ranking Cardinals, who receive a five year
appointment by the Pope (one of the members of the Cardinals' Commission is also the President
of the FIA (for further details see under sections 2.5 and 3.10 below)). The Commission is by
custom chaired by the Cardinal Secretary of State. The Cardinals' Commission convenes at least
bi-annually and oversees the compliance of the IOR with its statutory norms according to the
manner provided for in the By-laws. The Cardinal's Commission appoints and removes the
members the Oversight Council, which is another supervisory board composed of five (lay) non-
executive directors, which is responsible for the "administration and management of the Institute"
as well as the "oversight and supervision of its financial, economic and operational activities".
The President and the Vice-President can be appointed and removed by the Cardinal's
Commission based upon proposals made by the Oversight Council. The legal representation of the
Institute is the responsibility of the President of the Oversight Council.

75. Finally, the Directorate is responsible for all operational activities of the Institute and is
accountable to the Oversight Council. It is composed of the Director General and the Vice-
Director. Both are appointed by the Oversight Council with the approval of the Cardinals'
Commission for an indeterminate or determinate period of time. The HS/VCS authorities point
out that, in line with the structure of juridical entities constituted by the sovereign and for
sovereign purposes, the three tier structure serves to provide sound business direction by lay
experts at the level of the Oversight Counsel, as well as Governmental policy direction at the
Cardinals Commission level.

76. The Chirograph also foresees the position of a Prelate, who shall be appointed by the Cardinals'
Commission and shall oversee the activities of the Institute. He shall also act as Secretary for the
Cardinals' Commission meetings and attend the meetings of the Oversight Council. The historical
reason for this position seems to be based on protocol. The position provides for a priest of
"regular rank" who is the interlocutor between the lay Oversight Council and the Cardinals'
Commission. According to the Authorities, the necessity for such interlocutors has diminished
over the years as interaction between Cardinals and lay persons has become less formal.
According to HS/VSC representatives this position is not always filled. This position was vacant
at the time of the first MONEYVAL on-site visit. On 1 December 2011 the Commission of
Cardinals approved a nominee to serve in the statutory position of Prelate of the IOR. The
nominee has not yet commenced his service.

77. The Oversight Council appoints, for a duration not to exceed three years, three auditors with
specific administrative and accounting competence. The Auditors' positions can be renewed. The
auditors are directly accountable to the Oversight Council for their activities 24 .

Financial activities

78. The following paragraphs will describe the financial activities carried out by the IOR. The IOR
accepts deposits and other repayable funds from its customers. The IOR representatives point out
that the term "customer" must be understood as a (natural or legal) person who, in accordance
with the rules of the governing Chirograph and the IOR By-laws is entitled to participate in the
IOR fund. Those persons are listed in the attachment of the "IOR Internal AML/CFT Policy" (see
Annex XXVII).

24 In addition to the statutory auditors, the IOR is audited by external auditors who are hired by the IOR and are
from one of the major four audit firms. The same company is also hired by the IOR, not in its accounting
capacity, but in its compliance capacity. In this capacity, the audit firm oversaw and made recommendations to
all of the structures related to AML procedures, which have been followed by the IOR.

31

79. Participation in the IOR fund is hereinafter referred to as "holding an account" because this is the
term that is most commonly used. However, the term "holding a position in the fund" appears to
describe more accurately the customer relationship than the term "account" does. The IOR
representatives stress that the (natural or legal) person, who holds a position has no contractual
relationship with the IOR in the nature of a bank and a title to specific funds is not created.
However, from a functional point of view, the way this relationship can be used by the customer
is very similar to commonly known account services.

80. The IOR provides payment means such as debit cards and cheques for funds deposited with the
IOR. Cash can be withdrawn at 13 automated teller machines (ATM) maintained by the IOR
within the Vatican City State. The ATM service is only accessible to clients of the IOR. The
ATM service is a private network within the VCS, which is not linked to any Italian or
international ATM service (Pagobancomat, MAESTRO, CIRRUS etc.). It facilitates the
withdrawal of low amounts of cash (daily limit of €550) in order to avoid queues at the cashiers
and is particularly used by the Vatican employees to cash their salaries. In addition, the IOR
manages 120 Points of Sale, which refer to credit card processing terminals which operate on
territory controlled by the HS/VCS (e.g. in order to process cashless payments at the Vatican
museums).

8 1 . The IOR also enables customer payments via wire transfers, which is one of the most important
services provided by the IOR.

82. Furthermore the IOR invests, administers or manages funds on behalf of its customers and on its
own account 25 . The IOR invests mainly in fixed interest securities having low risk and short
duration. Few investments are made in equities, cash and cash equivalents, precious metals or
foreign currencies.

83. As a result of the above described business activities the revenues of the IOR result from
commissions and service fees 26 and earnings from its own proprietary trading activities.

84. The IOR can only invest and transfer assets through foreign banks. At the time of the
MONEYVAL on-site visits the IOR used the services of more than 40 correspondent banking
relationships in Europe, the US, Australia and Japan to operate those investments and transfers.

85. The IOR provides services through only one establishment, which is located in a government
building within the State of Vatican City. According to the IOR representatives, loans do not
constitute a source of true revenue or financial activity. As a service to Vatican employees and
qualified ecclesiastical institutions, "modest credit" is extended against salaries received and paid
out by the IOR. A percentage of the assets committed by the Institute provides guarantees to
canonical legal entities to assist them with transitional cash flow/credit needs (i.e. temporary
bridging loans).

86. The IOR in general does not provide financial leasing and commitments.

87. The IOR does not engage in the underwriting and placement of life insurance and other
investment related insurance.

88. The following table sets out the activities or operations undertaken by the IOR (and APSA)
which, if conducted as a business for or on behalf of a customer, would qualify institutions
undertaking them to be considered as "financial institutions" within the definition of that term
provided in the FATF Methodology. The relevant supervisor is indicated in the table, and whether
the institutions concerned have applicable AML/CFT requirements.

25

The IOR representatives point out that the funds are held in custody and administration together with other
funds of the Institute, consistent with the statutory purposes of the Institute itself.

26 The IOR representatives stress that the terms "commission" and "fee" do not reflect the true legal nature of
the relationship between the IOR and fund participants. The amounts retained by the IOR reflect a fund quota
which is used for the purpose set forth in the founding documents (Chirograph and by-laws).

32

Type of financial activity

Legal
entity

Subject to

AML/CFT

requirements

AML/CFT

Supervisor/
Regulator

Acceptance of deposits and other repayable funds from
the public (including private banking)

IOR/APSA

Yes

FIA

Lending (including consumer credit; mortgage credit;
factoring, with or without recourse; and finance of
commercial transactions (including forfeiting))

Financial leasing (other than financial leasing
arrangements in relation to consumer products)

The transfer of money or value (including financial
activity in both the formal or informal sector (e.g.
alternative remittance activity), but not including any
natural or legal person that provides financial
institutions solely with message or other support
systems for transmitting funds)

IOR/APSA

Yes

FIA

Issuing and managing means of payment (e.g. credit
and debit cards, cheques, traveller's cheques, money
orders and bankers' drafts, electronic money)

IOR/APSA

Yes

FIA

Financial guarantees and commitments

Trading in:

(a) money market instruments (cheques, bills, CDs,
derivatives etc.);

(b) foreign exchange;

(c) exchange, interest rate and index instruments;

(d) transferable securities;

(e) commodity futures trading.

IOR/APSA

Yes

FIA

Participation in securities issues and the provision of
financial services related to such issues

IOR/APSA

Yes

FIA

Individual and collective portfolio management

IOR/APSA

Yes

FIA

Safekeeping and administration of cash or liquid
securities on behalf of other persons

IOR/APSA

Yes

FIA

33

Otherwise investing, administering or managing funds
or money on behalf of other persons

IOR/APSA

Yes

FIA

Underwriting and placement of life insurance and other
investment related insurance (including insurance
undertakings and to insurance intermediaries (agents
and brokers))

Money and currency changing

IOR/APSA

Yes

FIA

89. IOR representatives stated that several years ago the IOR determined to dispose of any remaining
stakes in other financial institutions. IOR representatives confirmed that the IOR presently has no
holdings greater than one percent in any financial institution either held solely by the IOR or
when aggregated with other HS/VCS bodies.

90. Pursuant to Art. 8 a) of the IOR By-Laws the Cardinals' Commission "deliberates, having become
acquainted with the year's budget and with the exception of the Institute's minimum liquidity
standards for the distribution of funds". In the first trimester of each year the Directorate has to
compile the balance sheet (Profits, Losses and statements of Assets and Liabilities, according to
generally accepted accounting principles) relative to the activities of the preceding year (Art. 23
IOR By-Laws). The balance sheet of the IOR is not publicly available (and has not been made
available to the evaluators). HS/VCS authorities stress however that the IOR balance sheet has
been certified by an independent external auditor of international repute since 1990. During the
first onsite visit, HS/VCS authorities made available to the evaluators the auditor's management
letters for the years 2009-2010.

91. In 2010 the IOR made available €55 million to the apostolic and charitable works of the Pope.
The fund is simply available to the Holy See, as directed by the Holy Father, or by his delegates
to exercise its universal mission. As a general rule, the IOR informs the Holy Father about
amounts available, after which the Holy Father may choose to use all, part, or none of these
amounts. At the same time, HS/VCS representatives stress that it is important to understand that
amounts made available are not "owned" by the Pope. They are available for the use of the Pope
to pursue the universal mission of the church. This is considered by the HS/VCS representatives
as part of the exercise of governmental authority.

92. It should be noted that the global regulatory standard of the Basel Committee on Banking
Supervision regarding bank capital adequacy and market liquidity risk are applied as "best
practices". It was stressed however, that the IOR is not legally required to do so.

Customer structure

93. Pursuant to the IOR Internal AML/CFT Policy the IOR commits in accordance with Art. 2 and 3
of the IOR By-Laws to establish relationships only with the following types of clients:

34

Legal Person*

Natural Person*

Clergy

- Canonical Foundations;

- Beatification Causes;

- Vatican Congregations;

- Secular and Religious Congregations
(female);

- Secular and Religious Congregations
(male);

- Apostolic Delegations and
Nunciatures;

- Monasteries, Convents, Abbeys;

- Bishops' Conferences, Dioceses and
Representative Departments;

- Parishes, Churches and Pertinent
Departments;

- Seminaries, Colleges, Various Entities;

- HS Departments.

- Cardinals;

- Bishops;

- Nuncio, Permanent Observer;

- Employee/Secretary/Board member or
officer of the Nunciature;

- Religious and Secular Clergy;

- Nuns.

Clergy

and
Laymen

- Church staff and Secretary of State;

- Pontifical Household.

Laymen

- HS Employees;

- HS Retired Employees and
Assimilated;

- I.O.R. Employees;

- I.O.R. Retired Employees;

- Other Vatican Employees;

- Diplomatic corps accredited to the HS;

- Embassy to the Holy See;

- Ex relations with Holy See.

*A description of each of the customer types is set out in Annex XXXIV.

94. According to the IOR representatives, the abovementioned policy allows the IOR to operate
accounts for Holy See, Vatican or IOR employees only as long as salaries or pensions are
received.

95. The types of transactions which may be carried out for persons who do not have a pre-existing
business relationship with the IOR are listed below. Those persons must however belong to the
above-mentioned categories of customers permissible pursuant to the IOR Internal AML/CFT
Policy. The permissible occasional transactions are:

1) cheque cashing;

2) currency exchange;

3) wire transfers;

4) cheque shipping/delivery.

96. The breakdown and distribution of accounts operated by the IOR by industry code as at 30
November 2011, is set out as follows:

DESCRIPTION

NO.OF CLIENTS

Canonical Foundation

50

Beatification Causes

322

Vatican Congregations

23

35

Secular and Religious Congregations (Female)

1,935

Secular and Religious Congregations (Male)

989

Apostolic Delegations and Nunciatures

143

Monasteries, Convents and Abbeys

128

Bishops' Conferences, Dioceses and Repres. Depts

1,617

Parishes, Churches and Pertinent Departments

465

Seminaries, Colleges, Various Entities

837

Holy See Departments

134

Cardinals

236

Bishops

1,604

Secular Clergy and Religious Men

15,420

Nuns

1,529

Holy See Employees

4,594

Holy See Retired Employees

642

IOR Employees

144

IOR Retired Employees

66

Pontifical Family

37

Former Vatican Employees and Diplomatic Staff of the HS

1,065

Legal Persons Without Canonical Recognition

995

Diplomatic Corps Accredited To The Holy See

392

Embassy To The Holy See

37

5667,764

97. Geographically, the accounts are broken down as follows:

DESCRIPTION

NO.OF CLIENTS

Europe

29,271

Asia

665

Middle America

246

South America

1,184

North America

345

Other

51

Oceania

47

Africa

1,595

1386,05

98. The IOR has no central banks functions. In accordance with the Monetary Agreement with the EU
See Annex XXXII) the Vatican City State may use the Euro as its official currency and grants
legal tender status to Euro banknotes and coins. Based on this Agreement the Vatican City State
may issue Euro coins. The annual ceiling for coin issuance is determined by a Joint Committee
composed of representatives of the Vatican City State, the Italian Republic, the European
Commission and the European Central Bank (ECB) in accordance with the provisions of the
Agreement.

99. However, this agreement does not impose any obligation on the ECB and national Central Banks
to include Vatican City State's financial instruments in the list(s) of securities eligible for
monetary policy operations of the European System of Central Banks.

36

100. Pursuant to Art. 9 of the Monetary Agreement the financial institutions located in the Vatican
City State may have access to interbank settlement and payment and securities settlement systems
within the Euro area under appropriate terms and conditions determined by the Bank of Italy, in
agreement with the European Central Bank. These terms and conditions have not been determined
yet.

II. Administration of the Patrimony of the Apostolic See (APSA)

History of APSA

101. His Holiness Pope Paul VI, in accordance with the Apostolic Constitution Regimini Ecclesiae
Universae of August 15' , 1967 established the "Amministrazione del Patrimonio della Sede
Apostolica", that consists of two sections: The Ordinary Section ("Sezione Ordinaria") and the
Extraordinary Section ("Sezione Straordinaria").

The Ordinary Section

102. The Ordinary Section continues the work of the Administration of the Property of the Holy
See ("Amministrazione dei Beni della Santa Sede"). The Administration of the Property of the
Holy See has its origins in a Commission of Cardinals that His Holiness Pope Leo XIII set up by
a Motu Proprio dated December 11 th , 1880 and May 23 rd , 1883, to supervise, as an advisory body,
the Administration of the Peter's Pence and the Patrimony still belonging to the Holy See after
occupation of the ancient Pontifical State by the Italian Army in 1870.

103. By another Motu Proprio of April 30 th , 1891 the Commission was given direct responsibility
for the management of the Patrimony of the Holy See and the Commission's powers were also
extended to all the other related branches and economic affairs.

104. His Holiness Pope Pio XI by a Motu Proprio of December 16 th , 1926, decided to merge the
Prefecture of the Apostolic Palaces and the Ecclesiastical Ministry Unit Administrative Offices
into the general Administration of the Property of the Holy See.

The Extraordinary Section

105. The "Administrazione Speciale della Santa Sede" was established by His Holiness Pope Pio
XI, by a Motu Proprio of June 7th, 1929, to manage the funds given to the Holy See by the Italian
Government, deriving from the financial convention attached to the Lateran Treaty of February
11 th , 1929 (see Annex VII). In compensation for the properties confiscated by the Italian
Government, the Holy See received the amount of one billion and 750 million Liras, which
represents the historical patrimony of the Administration.

Legal status

106. The APSA is a Dicastery of the Holy See. It represents one of the three Offices of the Roman
Curia. The APSA is subject to the supervision of the Prefecture for the Economic Affairs of the
Holy See.

Internal organisation of the APSA

107. The Internal organisation of APSA is determined by Art. 173 to 175 of the Apostolic
Constitution "Pastor Bonus" and the APSA Regulation (see Annex XXVIII). The latest version of
the APSA Regulation which contains details of the staff organisation was approved on November
23 rd , 2010 by His Holiness Pope Benedict XVI. The new rules aim to improve the office
organisation and management and the service to the Curia Romana.

108. Pursuant to Art. 173 of the Apostolic Constitution "Pastor Bonus" APSA is presided over by a
Cardinal assisted by a Board of Cardinals. The two sections, the Ordinary Section and the
Extraordinary Section, are under the control of the Prelate Secretary assisted by two Deputies, one
for each section. (Art. 2 § 2 APSA Regulation).

109. The APSA relies on the consultancy of international clergy and lay experts. The consultants,
who usually work for free, express their views on issues of financial, real estate, legal, tax and

37

business issues. The consultants are appointed by His Holiness the Pope on the proposal of the
President Cardinal for a period of five years.

Financial Activities

110. Based on Art. 174 of the Constitution Pastor Bonus and Art. 8 § 1 of the APSA Regulation the
Ordinary Section administers the real estate entrusted to its care. It is also responsible for the legal
and administrative requirements concerning employees of the Holy See; it supervises institutions
under its fiscal responsibility 27 ; it ensures the purchasing of goods and services required to carry
out the ordinary business and specific aims of the dicasteries; and it maintains records of income
and expenditures, prepares the accounts of the money received and paid out for the past year, and
draws up the estimates for the year to come.

111. Based on Art. 175 of the Constitution Pastor Bonus and Art. 8 §2 of the APSA Regulation, the
Extraordinary Section administers the moveable goods resulting from the financial Convention
annexed to the Lateran Treaty of February 11 th , 1929 and those acquired later and manages those
entrusted to it by other institutions of the Holy See, including the Roman Curia, Vatican Radio,
the Apostolic Library and some foundations constituted under Vatican Law.

112. The movable goods administered by the Section consist of cash, financial instruments and
other values. The Extraordinary Section may exceptionally carry out financial transactions on
behalf of individuals, with the approval of the President Cardinal, but never for the staff of the
APSA.

113. According to the APSA representatives APSA holds accounts and deposits (exclusively
managed by the Extraordinary Section) with many Central Banks in the world, such as: Bank for
International Settlements, Bank of Italy, Federal Reserve Bank, Bank of England, Deutsche
Bundesbank and others.

114. The Extraordinary Section is responsible for executing payment orders on behalf of various
institutions of the Holy See. It manages the entrusted patrimony, having relationships with banks
around the world, investing either in financial markets (deposits, equities, bonds), or in real estate
in France, England and Switzerland. The properties in those countries are managed by APSA's
wholly owned real estate companies. The members of the APSA management are also board
members of the real estate companies.

115. The Extraordinary Section of APSA also manages the salaries payments for around 2,400 HS
employees. On behalf of the Pension Fund, APSA manages the payment of pensions for 1,600
former HS and VCS employees. The Italian bank requires a tax identification code ("codice
fiscale") to carry out such operations. APSA (including both Ordinary and Extraordinary
Sections) is the only institution within the Holy See which has an Italian tax identification code.
The code is used either by the Ordinary Section for real estate purposes (owning properties in
Italy), or by the Extraordinary Section for financial purposes (owning bank accounts in Italian
banks).

Customer structure

116. As outlined above the APSA is a dicastery of the Holy See. All services carried out by the
Ordinary Section and the main services carried out by the Extraordinary Section are provided for
the Holy See and its institutions.

117. In addition, the Extraordinary Section is allowed - in accordance with the Constitution Pastor
Bonus and the APSA Regulation - to provide some financial services to natural persons (clerical
and lay) that are not organs or bodies of the HS/VCS with the approval of the President Cardinal.
It was noted that these services were limited to 23 persons (15 clergy and 8 laymen accounts) at

27 This supervisory function is shared with the Prefecture for the Economic Affairs.

38

2S

the time of the MONEYVAL on-site visits . The assets deposited in those accounts amount
together to approximately €10 million.

Extraordinary Section

Natural/ Legal

Cleric/Laymen

No. of
accounts

Assets
(€)

Legal persons

Clergy (e.g. Holy See Institutions,
Religious Orders)

79

670.0 million

Natural persons

Clergy ( e.g. Cardinals, Bishops)

15

7.2 million

Laymen

8

2.8 million

Total

102

680.0 million

118. The accounts held for 15 individual clerical persons (e.g. Cardinals, Bishops) typically serve
the purpose of depositing charitable contributions made on their behalf, or in favour of the Roman
Curia or their own diocese of origin. The 8 lay persons holding accounts with the APSA have
typically donated moveable or immovable goods to the Holy See and in return receive a life
annuity which is accredited to their account with APSA.

119. The APSA representatives stated that in 2001 the Board of Cardinals took the decision to
gradually limit the provision of financial services to individual persons (both clerical and lay) that
are not organs or bodies of the HS/VCS. Finally, on 27 January 2006, the Board of Cardinals
decided to start the process of closing all remaining accounts with those persons as far as possible
(copies of the minutes recording these decisions were shown to the evaluation team). The
representatives of APSA also stressed that since 2001 no deposits have been accepted for the
remaining 23 accounts of natural persons. APSA only managed the assets deposited within those
accounts and only the yields of the assets managed were reinvested.

120. The APSA representatives advised that there are no profits earned by providing financial
services to the remaining persons that are not organs or bodies of the HS/VCS. Only APSA's
expenses for administering those accounts are charged to the account holders. (There are also no
profits earned with respect to services provided for organs or bodies of the HS/VCS, as costs are
directly absorbed by the APSA itself.)

Main differences between IOR and APSA

121. APSA, in contrast with the IOR, is a dicastery which is headed by a Cardinal President who
has a particular ecclesiastical relationship to the sovereign. In fact, this dicastery has special duties
of a canonical nature to the Roman Curia. Thus, while the IOR may perform certain analogous
activities, it is a separate legal person not headed by a Cardinal President.

122. APSA is a department of the Roman Curia. As such, it is part of the core administrative
structure of the Curia and, according to Pastor Bonus, must serve the Curia according to the
provisions of Pastor Bonus. This is referred to in canonical administrative law as a "competence."
The IOR does not have a "competence" in the administrative sense within the Roman Curia
because it is not part of the core administrative structure of dicasteries. As a dicastery, APSA
serves the Roman Curia (and the departments of the VCS (See Pastor Bonus)). With the exception
of the above-mentioned residual accounts which arise from a period prior to 2000 its account
structure and functions are exclusively governmental.

123. The IOR, by contrast, is a separate legal person which administers a different patrimony of
different origin and which has a "mission". In Canon Law, a foundation (unlike a dicastery) is

APSA representatives informed the evaluators that following the first MONEYVAL on-site visit the holders
of the 8 lay accounts have been contacted. Three of those accounts have already been closed, two further
accounts are in the process of being closed and the assets of the three remaining accounts will become property
of APSA upon the death of their respective beneficiaries. APSA also informed that the remaining 15 clergy
accounts are difficult to close, given that they are related to long-standing account holders of APSA and it would
be delicate to explain to them that they have to terminate this relationship with APSA.

39

assigned a "mission" in its founding documents, as is consistent with the creation of any legal
person. That mission, stated in the Chirograph and by-laws of the IOR - is to receive and take
custody of patrimony, obtain fruits from that patrimony, and facilitate its use and distribution on
behalf of the Universal Church. In this regard, rather than being a dicastery, legally equal with
other dicasteries, but assigned a different competence, the IOR is a creature of the Sovereign
which interacts primarily with the Secretary of State under a Cardinal's Commission, which is
presided over by the Cardinal Secretary of State. Finally, the custody of the patrimony held serves
the Universal Mission of the Church by serving Nunciatures, Dioceses and religious orders in the
promotion of religious works and charity.

124. The following table provides an overview of assets under management and organisation of the
IOR. Figures for APSA are also provided for ease of comparison.

As of November 201 1

IOR

APSA

(Extraordinary
Section)

Assets under management

€6.3 billion

€680.7 million 29

Number of customers

20,772

102

Natural persons

75%

23 (20%)

- Clergy accounts

68%

15 (65%)

- Laymen accounts

32%

8 (35%)

Legal persons

25%

79 (80%)

Number of employees

104

13

Internal audit

Yes

Yes

External audit

Yes

No

Financial statements audited by
Prefecture for the Economic
Affairs of the HS

No

Yes

Number of dormant accounts

4,494

None

Categorisation as financial institution

125. In consideration of the foregoing description of the financial activities and customer
structure of the IOR and the APSA the evaluation team concluded that both entities conduct as a
business one or more of the activities or operations for or on behalf of a customer as listed under
the definition of "financial institution" in the glossary to the FATF 3rd round Methodology. It
should also be recalled that the FIA, the competent supervisory authority, has also identified both
the IOR and APSA as entities conducting professionally activities as listed in Art. 2 a) of the
revised AML/CFT Law which have been taken from the glossary definition of "financial
institutions". An "activity conducted professionally" is defined in Art. 1 §1 of the revised

29

Data includes both the funds managed on behalf of organs or bodies of the HS/VCS and on behalf of selected
natural and legal persons.

40

AML/CFT Law as an organised economic activity, conducted regularly, for the production or
exchange of goods and services, for and on behalf of a third party.

126. HS/VCS representatives agreed that the IOR and APSA must be treated as a "financial
institutions" for the purposes of this evaluation, as this is the closest analogous category under the
FATF Recommendations. However, HS/VCS representatives would like to reiterate that the IOR
is a public institution whose nature is public and activity is iure imperii (by virtue of its
sovereignty), but which also conducts activities comparable with that of a financial institution,
which are iure gestionis (commercial or private acts) in character. Concerning the APSA, it has to
be reiterated that this entity, being part of the core governmental structure of dicasteries, mainly
performs an institutional activity with the exception of the 23 above-mentioned residual accounts
held on behalf of natural persons.

Designated Non-Financial Businesses and Professions (DNFBP)

127. As an introductory remark, it should be noted that pursuant to Art. 7. of Act No. V on the
economic, commercial and professional order of 1929, no one is entitled to open shops,
businesses or workshops, even for the exercise of simple trades, nor set up industrial or
commercial enterprises of any kind, nor open offices, studios, agencies or fixed places of delivery
for the exercise of any profession, without obtaining authorisation from the Governor (see also
sections 5.1 and 5.1 of this report). Accordingly, all services and activities that would fall under
the category of DNFBP activities within AML/CFT evaluations are, in the context of the
evaluation of the HS/VCS, subject to the above-mentioned authorisation regime.

Casinos (including internet casinos)

128. The establishment of casinos is expressly prohibited. This prohibition comprises land based
and internet casinos.

Real estate agents, dealers in precious metals or stones, trust and company service providers

129. HS/VCS authorities state that no real estate agents operate within HS/VCS (as no real estate
transactions take place in the territory of the VCS). As far as the HS is involved in real estate
operations located on foreign territory and to the extent that real estate agents are involved in such
transactions, foreign law would be applicable according to the principle of territoriality.

130. Furthermore, there are neither dealers in precious metals nor dealers in precious stones
providing services in HS/VCS. Nor are there any trust and company service providers active
within HS/VCS.

131. Nevertheless, all of the abovementioned DNFBP categories are listed in the AML/CFT Law as
subjects obliged to fulfil the requirements set out in the AML/CFT Law (to the same extent as
financial institutions). DNFBP were primarily included in the AML/CFT Law because the
legislator wanted to replicate European and FATF standards. It was also intended as a safeguard
to cover any possible future activities or activities of which the authorities are possibly not yet
aware.

Lawyers, notaries and other independent legal professionals and accountants

132. There are a few foreign domiciled lawyers operating within the HS/VCS (also within its
tribunals) and there is one public notary. There are also several foreign domiciled external
accountants operating for different entities within the HS/VCS. While HS/VCS authorities
acknowledge that such professionals are active within the HS/VCS, they stress that they do not
prepare for or carry out transactions for their client concerning the activities mentioned under
Recommendation 12 (d):

• buying and selling of real estate;

• managing of client money, securities or other assets;

• management of bank, savings or securities accounts;

41

• organisation of contributions for the creation, operation or management of companies;

• creation, operation or management of legal persons or arrangements, and buying and

• selling of business entities.

133. It appears that no relevant services are provided by lawyers and the public notary. However,
the evaluation team takes the view that there are accountants preparing and carrying out
transactions for clients in relation to the managing of client moneys, securities or other assets as
well as in relation to the management of bank, savings or securities accounts. This refers in
particular to the examination of the financial statements of the IOR. Therefore the evaluation team
concludes that relevant services under Rec. 12 (d) are provided in practice.

1.4 Overview of Commercial Laws and Mechanisms Governing Legal Persons and

Arrangements

134. Art. 4 of Act No. LXXI of 2008 on Sources of the Law (see Annex XII) applies the Italian
Civil Code of 16 March 1942, as adapted until the entry into force of the Act (1 October 2008)
and adopts it as the Civil Code of the VCS. Art. 4 then sets out a number of reservations which
adapt the Civil Code to the special situation of the VCS.

135. At present the Vatican commercial law is governed by Book V of the Italian Civil Code, and
in particular by: a) Arts. 2082 ff., concerning enterprises; b) and Arts. 2247 ff., concerning
companies.

136. With regard to independent legal persons, Law No. V on the economic, commercial and
professional order of 7 June 1929 (see Annex XXX) appears to create what is in effect a public
monopoly regime within the territorial jurisdiction of the VCS. In particular, Art. 4 states "The
purchase of goods or commodities of any kind and origin, meant for resale, and their sale are
reserved to the State monopoly, according to provisions to be established by regulations."

137. Furthermore Art. 2 states that "The Governor's authorisation shall be necessary for the
alienation of real property located within the territory of Vatican City by deeds inter vivos with or
without payment, for the establishment of rights of long lease, surface, use, interest in rem limited
in time, easement, mortgage or any other real interest, as well as for the lease and sublease, even
partial, of the same property and for any duration." Art. 2 also provides that "The deeds foreseen
in this paragraph shall be void and null if they lack said authorisation.".

138. In these circumstances it has been concluded that, at the time of the MONEYVAL on-site
visits, it was not possible to establish an independent legal person within VCS and the evaluators
did not observe any indications to the contrary. This is considered further in section 5.1 below.

1.5 Overview of Strategy to Prevent Money Laundering and Terrorist Financing

a. AML/CFT Strategies and Priorities

139. In the preamble to the Original AML/CFT Law the HS/VCS set out their understanding of the
threat posed by money laundering and the financing of terrorists and state that "laundering of
proceeds resulting from illicit activities and, likewise, exploiting the financial system to transfer
assets deriving from criminal activities or also money of licit origin to finance terrorism,
undermine the very foundations of civil societies, thus representing a threat for the integrity,
regular functioning, reputation and stability of financial systems."

42

140. The preamble also states that "any State and jurisdiction, by reasons of the cross-border
peculiarities of the phenomena of money laundering and financing of terrorism, must offer their
contributions by introducing into their respective domestic legislations rules and measures
consistent with the principles and standards agreed upon on the international and Community
levels to fight against money laundering and financing of terrorism".

141. Furthermore, the HS/VCS commitment to supporting the proper use of the economy and
financial markets was set out in Pope Benedict XVFs Encyclical Letter Caritas in veritate, which
stated "Efforts are needed - and it is essential to say this - not only to create "ethical" sectors or
segments of the economy or the world of finance, but to ensure that the whole economy - the
whole of finance - is ethical, not merely by virtue of an external label, but by its respect for
requirements intrinsic to its very nature".

142. The HS/VCS authorities have therefore taken a number of steps to introduce measures to
counter the threat to the financial systems of HS/VCS being utilised for the purposes of money
laundering and the financing of terrorism, notably:

a. On December 17, 2009, the VCS signed the Monetary Convention with the European
Union (2010/C 28/05), undertaking: «to adopt any appropriate measures, by direct
reception or equivalent actions, to implement the legal instruments and rules of the
EU ... in matters of: ... prevention of money laundering» (Art. 8, § b)).

b. On December 30, 2010, the Pontifical Commission for the VCS adopted Act No.
CXXVII concerning the prevention and countering of the laundering of proceeds of
criminal activities and financing of terrorism.

c. On the same day, Pope Benedict XVI promulgated the Apostolic Letter in the form of
a Motu Proprio on the prevention and countering of illegal activities in the financial
sector. The Motu Proprio established the Financial Intelligence Authority (FIA) as
the financial intelligence unit (FIU) for the VCS.

d. In his Motu Proprio, Pope Benedict XVI extended the application of Act No.
CXXVII/2010 to the dicasteries of the Roman Curia and for each and every
dependent institution or entity in which they carry out their activities (i.e. within the
legal framework of the HS), after expressing his concern that: "in our time, inside an
ever more globalised society, peace is always threatened by different causes, among
which an improper use of markets and economy, and the terrible and destructive
cause of violence perpetrated by terrorism, thus causing death, pain, hatred and social
instability".

e. On 24 January 2012, the Holy See mandated a decision to take all necessary steps to
apply for membership of the Egmont Group (of financial intelligence units).

f. On January 25, 2012, the President of the Governorate of the Vatican City State
signed a Decree which modified and integrates Law No. CXXVII/2010 in order to
introduce further provisions to remedy deficiencies in the application of international
standards.

g. Also on January 25, 2012, the Holy See, acting also on behalf of the VCS, deposited
before the Secretary-General of the United Nations the instrument of ratification of
the 1988 UN Convention against the Illicit Traffic in Narcotic Drugs and
Psychotropic Substances, as well as the accession instruments to the 1999
International Convention for the Suppression of the Financing of Terrorism, and to
the 2000 UN Convention against Transnational Organised Crime .

so

Subsequent to the second MONEYVAL on-site visit, the HS/VCS authorities informed the evaluators that an
in-depth analysis of the substantive provisions of the VCS Criminal Code had been initiated, in order to
introduce modifications to the Criminal Code to fully state in the municipal law treaty terms, including, inter

43

143. As stated above, Act No. CXXVII concerning the prevention and countering of the laundering
of proceeds of criminal activities and financing of terrorism was enacted on 30 December 2010
(the original AML/CFT Law) and came into force on 1 April 2011. This law was introduced in
order to implement an AML/CFT regime within the HS/VCS and also to implement the Monetary
Convention between the Vatican City State and European Union. The evaluators considered the
effectiveness of the implementation of this act during the first MONEYVAL on-site visit in
November 2012. Following the first MONEYVAL on-site visit the President of the Governorate
using his powers under Art. 7 of the Fundamental Law of VCS (see Annex X) to issue
dispositions having the force of law in cases of urgent necessity, enacted Decree No. CLIX -
Decree of the President of the Governorate of the Vatican City State promulgating amendments
and additions to Law n. CXXVII, On the Prevention and countering of the laundering of the
proceeds of criminal activities and the financing of terrorism, of 30 December 2010 (the revised
AML/CFT Law) which came into immediate effect on 25 January 2012. This Decree substantially
amended and supplanted the original law. The Decree was guided by the need to better allocate
AML/CFT responsibilities amongst the competent authorities in order to make the HS/VCS, as a
whole, more effective in preventing and countering ML and FT. The Decree clarifies the
responsibilities of competent authorities and confirms and clarifies the FIA's fundamental powers
both as a supervisor and as the FIU of the HS/VCS. The aim of the Decree was also to implement
the international standards, and adapt the international standards to the context of the HS/VCS, in
order to make the AML/CFT system effective. The Decree introduced new provisions in the fields
of crimes and sanctions, international cooperation, customer due diligence, registration and record
keeping, reporting of suspicious transactions. In the field of measures to counter financing of
terrorism and the activities that threaten international peace and security, the Decree clarified the
mechanisms according to which the HS/VCS adopts a domestic list of designated persons, also to
implement the relevant Resolutions of the UN Security Council. This Decree loses its force if it is
not confirmed by the Pontifical Commission within 90 days 31 .

144. Following the formation of the FIA, regulations and instructions were prepared and issued to
relevant bodies within the VCS. These regulations and instructions seek to provide detailed
guidance and direction on the various AML/CFT measures that need to be in place to facilitate the
development of a comprehensive AML/CFT regime within HS/VCS. The evaluators consider that
the Regulations and Instructions constitute "other enforceable means". The reasons for this are set
out under SR.VII in Section 3.5 below.

145. The HS/VCS authorities have stated that their medium and long-term strategy in the
prevention and countering of money laundering and financing of terrorism, may be summarised as
follows:

a. to continue their efforts in the ethical foundation of economic and financial activities;

b. to continue their efforts towards the conformity with the international and European-
regional standards;

c. to improve the effectiveness of the implementation of the internal laws, regulations
and other imperative measures;

d. to increase institutional co-operation between the internal authorities;

e. to improve and increase the international co-operation.

146. This strategy will be continued under five "pillars" or fundamental principles:

alia, articles 8 and 9 of the United Nations Convention against Transnational Organised Crime (Palermo
Convention). The Holy See furthermore notes that, according to the terms of its internal law, to the extent
possible, treaty terms are directly incorporated into the legal system. Finally, HS/VCS authorities are actively
considering ratification of the 2003 United Nations Convention against Corruption (the Merida Convention).

31 The Pontifical Commission for the Vatican City State confirmed the Decree No. CLIX of 25th January 2012
without modification on 24th April 2012.

44

h. Human dignity and common good: the fundamental principle is that finance cannot
be contrary to human dignity and must contribute to the realisation of the common
good;

i. Subsidiarity: prevention and countering mechanisms tend to make the different
decision-making and operational levels of subjects involved and responsible in the
prevention and countering of money laundering and financing of terrorism;

j. Proportionality: prevention and countering mechanisms intervene following an
accurate assessment of the suspect property and transactions and risks;

k. Effectiveness: prevention and countering mechanisms must be adequate to the
realisation of the objectives set;

1. Co-operation: activities of preventing and countering the laundering of proceeds of
criminal activities and financing of terrorism are carried out by ensuring maximum
communication and co-operation between the internal, international and regional
authorities competent in this matter.

b. The institutional framework for combating money laundering and terrorist financing

147. The following are the main bodies and authorities involved in combating money laundering or
financing of terrorism:

Governorate

148. The legislative power within VCS is exerted by the Pontifical Commission for the VCS,
whose members are appointed by the Pope for five years (Art. 3, §1 of the Fundamental Law (see
Annex X).

149. The executive power is exerted by the President of the Governorate of the VCS, an office held
by the same Cardinal heading the Pontifical Commission, assisted by a Secretary General and a
Vice-Secretary General (Art. 5).

150. In the Governorate different functions are established (see 1.1 above), which are normally
distributed among various departments (commercial, legal, technical, artistic, general
maintenance, etc.). Relations with foreign states is the competence assigned to the Secretariat of
State.

151. The President of the Governorate is in charge of the legal representation of the State, but not
its international representation (Art. 8); he can issue orders for the implementation of acts and
regulations (Art. 7, §1); he can avail himself of law-enforcing bodies for security reasons, and of
the State's police as well (Art. 14), represented by the Corps of Gendarmes of VCS; in case of
emergency, he can issue provisions having the force of law, though, as noted above in the context
of the AML/CFT Law, they must be confirmed by the Pontifical Commission within ninety days,
otherwise they become ineffective (Art. 7, §2).

152. As far as the executive power is concerned, there are forms of supervision and control by the
Secretariat of State. To this end, the Fundamental Law establishes that "in matters of greater
importance it is necessary to proceed in agreement with the Secretariat of State" (Art. 6), and in
any case it is established that the VCS' budget and final balance, once they are approved by the
Pontifical Commission, "are submitted to the Supreme Pontiff through the Secretariat of State"
(Art. 12).

153. The Governorate is composed of operational bodies:

a. Departments. There are nine (State Accountancy, General Services, Security Services and
Civil Protection, Health and Hygiene, Museums, Telecommunications, Economic Services,
Pontifical Villas); the activities they carry out are of an institutional nature, related to
buildings and facilities, culture and scientific research, trade and marketing, public utility,
also in favour of other Vatican organisations, natural persons or third parties.

45

b. Directors. They head Departments, taking on the relevant responsibilities and co-ordinating
their functions and activities; they are directly accountable to the President.

c. Council of Directors. This is an advisory and auxiliary body to the President. It is more than a
traditional Board. The directors are the departmental heads of the Governorate and form the
Council which generally meets on a bimonthly basis to discuss common governance or
management issues.

d. Office Managers and Service Managers. They are directly accountable to the directors.

e. Central Offices. There are seven of them (Legal Office, Personnel Office, Registry Office,
Philately and Numismatics, Information Systems, State Archives, Pilgrim and Tourist
Office); they are in charge of carrying out particular activities related to the exercise of the
executive power and depend directly on the President.

f. Scientific Body. It is made up by the "Specola Vaticana" (Vatican Observatory) having an
autonomy status and operating in the sector of astronomic research.

154. Recently, the President's Office, has created new bodies that directly depend on the Secretary
General: the Goods and Services Purchase Office and the Internal Control Office.

155. As far as the institutional tasks of departments and offices are concerned, reference is made to
Act No. CCCLXXXIV of 2002 on The Government of the Vatican City State (see Annex XI).
According to the AML/CFT Law, in matters of combating the laundering of proceeds of criminal
activities and financing of terrorism, as far as the Governorate is concerned, the Department of
State Accountancy plays a supervisory role over the financial flows of the State and of more
general protection of the principles established in the same Act.

The Department of VCS Accounting

156. The Department of VCS Accounting is a section of the Governorate of the VCS. According to
the Act on the Government of the VCS No. CCCLXXXIV of 2002, the Department of State
Accounting takes care of the general and analytical accounting of State Bodies, carrying out
audits, preparation of reports relating to all economic and financial operations and management of
the State Treasury (Art. 11). The Department carries out audits and verification of the correct use
of accounting processes and their economic integration with the administrative procedures,
operating under a centralised form.

157. The State Accountancy Office is headed by a Director and is made up of the Administrative
Office and the Management planning and control Office. It has a staff of 27 people. The
Accountancy Office is responsible for the keeping of the general and detailed accountancy
records of all the bodies of the Governorate, on the basis of the accountancy principles indicated
by the Prefecture for the Economic Affairs of the HS (see below) and generally acknowledged
international accountancy principles. It carries out activities of accountancy control and draws up
the Governorate' s budget and final balance sheet. It manages the positions of all the suppliers of
the Governorate, by dealing with the input and keeping of the operational system of sensible data
communicated by the companies supplying goods and services to the State. The keeping and
maintenance of the panel of suppliers is part of the responsibility and competence of the Goods
and Services Purchase Office depending directly upon the Secretary General.

158. The State Accountancy Office furnishes expert opinions on fiscal, financial and economic
topics, and, to assure the full integration of administrative-accounting processes with the
operational ones, co-ordinates and supervises the ongoing standardisation of managerial
procedures of the Governorate' s Departments and Offices.

The Prefecture for the Economic Affairs of the Holy See

159. The Prefecture for the Economic Affairs of the HS is a dicastery of the HS. According to
Pastor Bonus, the Prefecture has the function of revising and governing the goods of the
administrations that are dependent on the HS, or of which the HS has charge (Art. 176). The

46

Prefecture is presided over by a Cardinal assisted by a board of Cardinals, with the collaboration
of the Secretary and the General Accountant (Art. 177).

160. The Prefecture studies the reports on the patrimonial and economic status of the HS, as well as
the statements of income and expenditures for the previous year and the budget estimates for the
following year of the administrations, by inspecting books and documents, if required. The
Prefecture compiles the HS's consolidated financial statement of the previous year's expenditures
as well as the consolidated estimates of the next year's expenditures, and submits these at specific
times to higher authority for approval (Art. 178).

161. Furthermore, the Prefecture supervises the financial undertakings of the administrations
(including APSA) and expresses its opinion concerning projects of major importance. Finally, it
inquires into damages inflicted in whatever manner on the patrimony of the HS, and, if needed,
lodges penal or civil actions to the competent tribunals (Art. 179).

Secretariat of State - the Section for Relations with States

162. As previously stated, as far as international representation is concerned in accordance with
Art. 2 of the Fundamental Law, "the representation of the State in the relations with foreign States
and other subjects of international law, for the diplomatic relations and the stipulation of treaties,
is reserved to the Supreme Pontiff who exerts it through the Secretariat of State".

163. Within the Secretariat of State, the Section for Relations with States or Second Section is
responsible for the diplomatic relations of the HS with States, including the signing of treaties and
similar agreements and the representation of the HS in international organisations and
conferences. The Second Section of the Secretariat of State is headed by an Archbishop, the
Secretary for Relations with States, assisted by a Prelate, the Under-Secretary for Relations with
States (Pastor Bonus Arts. 45-47).

164. The Secretariat of State concludes international agreements, and also has regard to matters
concerning the prevention and countering of laundering of unlawful money and financing of
terrorism, and deals with the relevant compliance with and ratification of such agreements.
Furthermore, it co-operates with the competent State or international authorities through its own
diplomatic channels.

Tribunals

Tribunals of the Vatican City State

165. The court system of the VCS is a department of the Governorate. According to Law No.
CXIX - Law that approves the Judiciary system of the State of Vatican City (see Annex XVI), the
following tribunals exercise judicial powers in the name of the Supreme Pontiff:

• Single Judge (Giudice Unico);

• Tribunal (Tribunale);

• Court of Appeal (Corte d'Appello);

• Court of Cassation {Corte di Cassazione).

166. The Single Judge handles simple cases such as small claims and traffic violations. The
Tribunal is composed of three judges appointed by the Pope and is the court of first instance in
criminal and civil cases which do not fall under the jurisdiction of the Single Judge. The Court of
Appeal serves as a disciplinary body for VCS lawyers, hears appeals from the VCS Disciplinary
Commission, and handles employment issues from the Office of Work of the Apostolic See. It
comprises a President and the three other judges who are appointed by the Pope and serve a term
of five years. The Court of Cassation is the highest court of the VCS. It hears appeals from the
Court of Appeal as well as penal matters against Cardinals and bishops which the Pope does not
handle personally.

167. Criminal jurisdiction over the offences described in the AML/CFT Law is vested in the
tribunals of the VCS by Act No. CXXVII of 2010. However, criminal cases may be transferred to

47

be prosecuted by the Italian authorities, as this is authorised by Art. 22 of the Lateran Treaty. The
number of cases considered in the period 2009-201 1 are set out below.

Year

Cases where violators of public safety

norms were detained by Vatican police

and handed over to the Italian authorities

Cases where Art. 22 of the Lateran

Treaty between the Holy See and Italy

was applied

2009

1

1

2010

7

2011

5

4

168. The functions of the prosecutor, in both civil and criminal cases, are performed by the
Promoter of Justice {promotore di giustizia) (see below).

Tribunals of the Roman Curia (Holy See)

169. The Holy See has a distinct court system which deals with religious affairs, violations of
Canon Law and cases related to the functions of the Holy See. Details of the tribunals are set out
in Arts. 1 17-130 of Pastor Bonus (see Annex VIII) There are 3 tribunals:

• Apostolic Penitentiary is responsible for the internal church forum and granting and use of
indulgences (Arts. 117-120);

• Supreme Tribunal of the Apostolic Signatura functions as the supreme tribunal and also
ensures that justice in the Church is correctly administered (Arts. 121-125); and

• Tribunal of the Roman Rota is a court of higher instance at the Apostolic See, usually at the
appellate stage, with the aim of safeguarding rights within the Church; it fosters unity of
jurisprudence, and, by virtue of its own decisions, provides assistance to lower tribunals
(Arts. 126-130).

170. The tribunals of the Roman Curia have no jurisdiction over ordinary civil and criminal cases.
However, the Supreme Tribunal of the Apostolic Signatura exerts disciplinary powers over judges
of the VCS. The President of the Court of Cassation is also the Prefect of the Apostolic Signatura,
and most judges of the Court of Appeal also serve as judges of the Roman Rota.

The Promoter of Justice

171. The Promoter of Justice of the VCS exerts a prosecutor's functions, both on the civil and
criminal side, before the Tribunal and the Single Judge of the VCS (Law no. CXIX Art. 5). The
Promoter of Justice is appointed by the Pope (Law no. CXIX Art 7). Judges are selected among
persons with high standards of morality and professional skills. The Prosecutor exercises his
functions with autonomy and independence and subject to the law.

172. According to the rules established by the internal legal system, the Promoter of Justice
performs his criminal law responsibilities by promoting and instigating inquiries and possibly
criminal prosecutions on the basis of circumstances or facts related to goods or natural and legal
persons, about which he is informed.

173. As far as the activities of prevention and countering of ML and FT are concerned, the
AML/CFT Law provides that the FIA carries out the financial examination of the reports received
by analysing and thoroughly investigating suspicious transactions and communicates to the
Promoter of Justice at the Tribunal the facts that, on the basis of their features, entity, nature and
other known circumstances, possibly indicate offences of money laundering, self-laundering or
financing of terrorism (Art. 33). Should the FIA suspend transactions, for a maximum of five
working days, it must give immediate notice to the Promoter of Justice at the Tribunal. The
Promoter of Justice, should inform the FIA about the reports of suspicious transactions on which
no further investigation has been carried out (Art. 36).

48

174. The criminal jurisdiction for the offences provided for in the AML/CFT Law is assigned to the
Tribunals of the VCS.

Gendarmerie Corps of VCS

175. The Gendarmerie Corps of VCS is part of the Department of Security Services and Civil
Protection of the Governorate.

176. The Department is in charge of the security and public order in close co-operation with the
Pontifical Swiss Guard 32 and the competent Vatican bodies. In accordance with the Lateran
Treaty, it can ask, through the institutional channels, for the co-operation of the equivalent entities
of the Italian State and other States. Relations between the Gendarmerie and the Italian Police are
conducted through the General Inspectorate of Public Security for the Vatican City (an Italian
state institution), which is the liaison body between the two countries.

177. The Gendarmerie's primary goal is the protection and security of the Pope when he is within
the VCS, when he is on pastoral visits in Italy and on his Apostolic journeys in other States. The
tasks assigned to it are the same institutional tasks as other national police forces, i.e. judicial
police, frontier police, fiscal police, etc., with the aim of assuring the security of places and
persons, keeping public order and preventing and repressing offences. However, because of the
peculiar character of the VCS, such as its territorial size and limited number of citizens, the
Gendarmerie is a police force sui generis. The Gendarmerie Corps is the only security agency and
police force of the VCS and it also acts as a road patrol, and in this context, it deals with the
prevention of road accidents and related interventions.

178. The Gendarmerie is covered by Act No. CCCLXXXIV of 2002 on The Government of the
Vatican City State (Art. 13) (see Annex XI), which provides the legislative basis for the goals and
competences of the Gendarmerie.

179. The Gendarmerie Corps co-operates, within the limits of its competence, with the Judicial
Authority of the VCS and the competent authorities of the HS. In particular, in the course of
investigative activities it co-operates with the Promoter of Justice and Single Judge who have the
power to impose coercive measures.

180. Gendarmerie activities include frontier controls, prevention of criminal activities and
investigations.

181. Furthermore, the Gendarmerie Corps has the power to enforce laws and regulations in matters
of trade and finance; in cases of necessity, it avails itself of all the legislative and sub-legislative
instruments, in order to be in a position to carry out the tasks of supervision, implementation of
investigative techniques, checks, confiscation, flagrante delicto procedures, inquiries and other
criminal procedural actions assigned by law or delegated to the Gendarmerie.

182. The Gendarmerie Corps, in co-ordination with the Secretariat of State and the Governatorate,
also has responsibility for maintaining contacts with foreign bodies and organisations, in order to
assure international co-operation in the fields of money laundering and fight against terrorism. In
strategic terms, one of the priorities in countering money laundering and fighting against terrorism
consists of reinforcing international mutual legal assistance and co-operation with the equivalent
foreign legal entities on the level of both bilateral relations and main international organisations,
such as INTERPOL.

183. The headquarters of the Gendarmerie is located in the premises of the Department of Security
Services and Civil Protection, where all the different functional police divisions are based.

32

The Pontifical Swiss Guard is a small force maintained by the Holy See and is responsible for the safety of
the Pope, including the security of the Apostolic Palace. It serves as the de facto military of Vatican City.

49

184. The structure of the Gendarmerie Corps is centralised and made up of offices specialised in
terms of technical-professional capabilities. It is entrusted with the prevention of, and fight
against, criminal activities. As far as fiscal crimes, economic crimes, prevention of terrorism and
organised crime are concerned, it is noted that:

Financial crimes. The Gendarmerie has jurisdiction over the whole territory of the VCS.
The officer in charge of the inquiries has competence over the whole territory of the State,
and is directly responsible to the Director of Security Services and Civil Protection. This
activity consists of detecting, documenting and investigating cases of economic and
financial crimes, and corruption. The investigating unit monitors and analyses unlawful or
suspicious financial operations and various kinds of economic crimes which have been
committed.

Prevention of terrorism and organised crime. The Gendarmerie has the competence
over the whole territory of the VCS, with the exception of the Apostolic Palace. The
officer in charge is directly responsible to the Director of Security Services and Civil
Protection. This activity consists of monitoring, documenting and preventing unlawful or
suspicious activities, adopting preventive and repressive measures on the basis of
intelligence information, detecting possible terrorists and delivering them to the court.

Frontier and customs control unit. This unit is in charge of fiscal crimes, border
security and any other related type of financial crime, including financing of terrorism.

185. There are two more specialised units, directly reporting to the Director of Security Services
and Civil Protection, for extremely serious or urgent interventions:

Anti-sabotage unit, in charge of dealing with threats connected to sabotage actions or
explosive devices. This special unit intervenes, for instance, in cases of locating parcels,
envelopes or other suspicious objects. Its actions consist of implementing all the security
measures aimed at recognising and neutralising such threats. Furthermore, it acts as a
support unit for judicial police activities.

Swift intervention squad, which was recently created with the goal of dealing with
emergencies outside the scope of ordinary police activities (e.g. subversive activities,
analysis and technical logistic support for investigative activities). Furthermore, it can
intervene immediately in high-risk situations.

Police authority of Italy

186. Art. 3 of the Lateran Treaty also provides:

"It remains understood that St. Peter's Square, although forming part of Vatican City, will
continue to be normally open to the public and to be subject to the police power of the Italian
authorities, who will stop at the foot of the steps leading to the Basilica, although the latter
will continue to be used for public worship, and they will, therefore, abstain from mounting
the steps and entering the said Basilica, unless they are asked to intervene by the competent
authority".

187. Art. 15 provides that certain designated properties, even if they form part of the territory of the
Italian State, will enjoy the immunities granted by International Law to the headquarters of the
diplomatic agents of foreign States. The same immunities apply also with regard to other churches
(even if situated outside Rome) during such time in which, without such churches being open to
the public, religious ceremonies are celebrated in them with the participation of the Supreme
Pontiff. However, Art. 22 does provide that:

"the Holy See will hand over to the Italian State persons who may have taken refuge within
Vatican City and who have been accused of acts, committed within Italian territory, which are
considered to be criminal by the laws of both States. The same provisions will apply with
regard to persons accused of crimes who may have taken refuge within the buildings declared

50

to be immune under Art. 15, unless the persons in charge of such buildings prefer to invite the
Italian police agents to enter them in order to arrest such persons".

Financial Intelligence Authority (FIA)

188. Pope Benedict XVI established the FIA by the Motu Proprio of December 30, 2010, in order
effectively to prevent and counter money laundering and financing of terrorism (See letter c, Motu
Proprio; and Art. 2 septies of the revised AML/CFT Law). The FIA has public canonical legal
personality and Vatican civil personality and has its headquarters in the VCS. The FIA supervises
the observance of the duties established in matters of prevention and countering of ML and FT
and receives reports of suspicious transactions which it analyses ( Art. 2 septies of the revised
AML/CFT Law). The FIA monitors obligors' compliance with the requirements set out in the
AML/CFT Law to prevent and counter money laundering and the financing of terrorism and
verifies, including through inspections, the suitability and effectiveness of the policies,
organisation, measures and procedures adopted by them to prevent and counter money laundering
and the financing of terrorism. (Art. 2 septies §2 ). The FIA has powers to impose administrative
sanctions (Art. 42). Full details of the FIA's functions are set out under section 2.5.1 below.

189. The FIA operates in close co-operation with the Judicial Authority. It can suspend, for a
maximum of five working days, transactions suspected to involve money laundering, self-
laundering or financing of terrorism, giving immediate notice to the Promoter of Justice at the
Tribunal (Art. 33 §5 k)). It informs the Promoter of Justice about facts indicating money
laundering, self-laundering or financing of terrorism (Art. 33 §3 & §5 c)).

190. Furthermore, the FIA, independently of the provisions adopted by Judges on the criminal
level, can order the freezing of assets and economic resources by its ruling, in order to counter or
repress financing of terrorism and the activity of countries threatening peace and international
security (Art. 24 §1). This is covered in detail under SR.III (see Section 2.4 below).

c. The approach concerning risk

191. There is a clear need for a comprehensive risk assessment to properly judge the adequacy of
the current risk based approach. The Secretariat of State has confirmed that, as a consequence of
the evaluation process, it has become aware of the importance of conducting a detailed risk
assessment in order to develop a comprehensive AML/CFT regime. As a consequence of this the
evaluators were informed that the process for conducting a risk assessment has been initiated.
This process will involve actively seeking recommendations from the FIA and more generally
gathering information necessary for the completion of the risk assessment including the
recommendations of the evaluators on this issue. Furthermore, the Secretariat of State has taken
into account an initial view from the FIA, indicating those areas of inquiry which typically present
possible areas of weakness in many jurisdictions, including: use of cash transactions; the
adequacy and availability of information from non-profit organisations; receipt of donations; and
placing of external contracts.

192. The AML/CFT Law has introduced elements of a risk based approach and details of this are
set out in section 3.1 below.

51

2 LEGAL SYSTEM AND RELATED INSTITUTIONAL MEASURES

Laws and Regulations

2.1 Criminalisation of Money Laundering (R.l and 2)

2.1.1 Description and analysis

Recommendation 1

193. Prior to the enactment of Act No. CXXVII of 30 December 2010 and its extension to the Holy
See by His Holiness Pope Benedict XVI in the introduction to the Motu Proprio of the same date
money laundering had not been specifically criminalised in the legal system of the HS/VCS. In
theory reliance could have been placed on the procedure provided by Art. 9 of Act No. LXXI on
the sources of law of 1 October 2008; (see Annex XII) designed to address lacuna in the system of
criminal law. While this had been utilised in the drugs area its application in the context of money
laundering was never tested.

194. In the period prior to the entry into force of the new law reliance had to be placed on Art. 421
of the Italian Criminal Code of 1889 which, failing specific HS/VCS legislative action, applies by
virtue of Art. 7 of the Act on the sources of law mentioned in the previous paragraph. This sets
out the offence of receiving stolen property and is worded thus:

Except in the cases provided in Art. 225, whomever acquires, receives or hides money
or things resulting from a crime, or is involved in any way with the acquisition,
receiving or hiding of them, without participating in the underlying crime, is punished
with imprisonment for up to two years or with a fine of up to three thousand lira. If the
money or things proceed from a crime which is subject to a term of imprisonment for
more than five years, the guilty party is punished with imprisonment from one to four
years.

In both cases provided for in the preceding provisions, the imprisonment should not be
more than half of the penalty established for the underlying crime from which the
things proceed. Where it regards a fine, the amount is determined according to the
norms established in Art. 19.

If the guilty person is a habitual receiver of stolen property, the term of imprisonment
is from three to seven years in the case provided in the first paragraph of this article,
and from five to ten years, in the case provided in the second paragraph and the fine
between three hundred and three thousand lira is always added.

The fine level has been adjusted upwards on several occasions to take account of inflation and of
the introduction of the Euro.

195. Those responsible for the drafting of the new law had two primary goals. First, to achieve
consistency with relevant international and European standards in this sphere. Second, to do this
in a manner broadly harmonised with Italian criminal law. The latter goal was, in turn, dictated by
considerations of geography and practicality. It was also influenced by Art. 22 of the Lateran
Treaty of 1929 (see Annex VII) which subjects aspects of an enhanced regime of criminal co-
operation with Italy to the condition of double criminality. This is examined in greater depth
below in the context of Recommendations 36-39 and Special Recommendation V. It is also

52

worthy of note for present purposes that in the FATF third round mutual evaluation of Italy in
2006 that country received a compliant rating for R. 1 .

196. As with Italy, Act No. CXXVII of 2010 adopted a drafting technique in relation to the
criminalisation of money laundering which had the receiving offence (above) at its foundation.
Art. 3, headed 'Money Laundering' is of primary importance. It was worded, in full, as follows:

In book II of "About offences in particular" Title X "About offences against property"
Chapter V after the section "About handling stolen goods" follows "about laundering and
self-laundering". In the same Chapter, after Art. 421 follows Art. 421 bis, that reads:

421 bis

He who, except for the cases foreseen in Art. 421, replaces or transfers money, goods or
other utilities resulting from a serious offence, or performs other operations linked to them,
in such a way as to hinder the identification of their criminal source, or uses, in economic or
financial activities, money, goods or other utilities resulting from a serious offence, is
punished with a detention of four to twelve years and a fine of one to fifteen thousand Euro.

In the cases foreseen by the preceding paragraph, the penalty consist of a detention penalty
of two to six years and a fine of one to ten thousand Euro, if the monies, goods or other
utilities result from a serious offence for which a penalty of detention inferior to the
maximum of five years is foreseen.

The person who committed the serious offence, shall be sentenced to a detention period of
two to six years and a fine of one to ten thousand Euro.

In the cases foreseen by the first paragraph, the sanction is increased if the fact is committed
within the exertion of a professional activity.

The offence occurs even when the activities that generated such monies, goods or other
utilities to be laundered, are performed in another state.

In the case of condemnation, the confiscation of the goods representing the product or profit
of the criminal activity is mandatory, except for the case that they belong to persons alien to
the offence. The judge, if it is not possible to proceed to the confiscation, shall order the
confiscation of money, goods or other utilities available to the convict, even through a third
person, for an amount equivalent to the value of the product, profit or price of the offence.

197. One of the consequences of this approach was that the language used differed substantially
from that found in the Vienna and Palermo Conventions of the UN (both of which have very
recently been ratified by the HS/VCS).

198. For the avoidance of doubt it should be stressed that though influenced by the Italian
provisions the articles addressing criminalisation were not identical to those which apply in that
country. There were differences in structure (two provisions in the HS/VCS rather than three) and
some departures in wording. However, the authorities confirmed to the evaluation team that the
only significant departure from the Italian precedent which was intended to be achieved was that
of the specific criminalisation in the legal system of the HS/VCS of self -laundering (criterion 1.6).

199. As was noted previously (see above), subsequent to the MONEYVAL on-site visit of
November 2011 the authorities of the HS/VCS decided to revisit the Act of December 2010 in
order to place the AML/CFT system on a more secure, long term and sustainable legislative
footing. The extensive amendments and additions to the law brought about by this process entered
into force on 25 January 2012. The text, which now exclusively occupies the field and thus
replaces the former law, is reproduced in full at Annex V for ease of reference.

200. In the course of this review process the relevant authorities took the decision to revisit the
approach originally adopted to the criminalisation of money laundering in order to more directly
embrace the concepts and the wording utilised in the relevant international standards. The 2005

53

Warsaw Convention of the Council of Europe and the UN Palermo Convention of 2000 were
particularly influential.

201. Art. 1(4) of the Law of January 2012 defines "money laundering" as follows:

a) the acts referred to in Art. 421 bis of the Criminal Code.

b) participation in one of the acts referred to in Art. 421 bis of the Criminal Code,

association to commit, attempt to commit, and aiding, inciting, or counselling
someone to commit such act, or abetting its execution;

202. Art. 421 bis is, in turn, inserted by Art. 3 of the Act headed "money laundering and self-
laundering". This is the first of two articles in Chapter II of the Act entitled "criminal provisions
on money laundering". Paragraph 1 is central to the new approach which has been adopted.
Drawing its inspiration primarily from Art. 9(1) of the Warsaw Convention, it is worded thus:

1. Whomever, outside the cases foreseen in Art. 421:

a) replaces, converts or transfers currency, funds or other assets, knowing that they proceed
from a predicate offence or from the participation in a predicate offence, for the purpose of
concealing or disguising their illicit origin or of assisting any person who is involved in the
commission of such criminal activity to evade the legal consequences of his actions;

b) conceals or disguises the true nature, source, location, disposition, movement, ownership
of, or the rights with respect to currency, funds or other asses, knowing that they proceed
from a predicate offences or from the participation in a predicate offence;

c) acquires, possesses, holds, or uses to currency, funds or other assets, knowing, at the time
of their receipt, that they proceed from a predicate offence or from the participation in a
predicate offence;

shall be punished with four to twelve years of imprisonment and with a fine ranging from
€1,000 to €15,000.

203. The physical and material elements of the offence are consistent with the relevant
international standards. Criterion 1.1 is thus satisfied.

204. Several of the key concepts utilised in 421 bis (1) are defined in Art. 1 of the 2012 Act
including "currency", "funds" and "other assets" (Art. 1(10), (11) and (12)). All are broadly cast.
In addition Art. 421 bis (2) provides as follows:

The crime of money laundering exists regardless of the value of the currency, funds or other
assets that proceed from the predicate offence, even when there has been no conviction for
that offence.

In the view of the evaluators the interaction of these features of the Act are sufficient to satisfy the
expectations of criterion 1.2 of the methodology.

205. As noted above, in the 2012 Act money laundering is defined in relation to the concept of
predicate offences. This concept is defined, in Art. 1(5) by reference to a list of specific offences
in the Criminal Code "as well as any other criminal acts punishable .... with a minimum penalty
of six months or more of imprisonment or detention; or with a maximum penalty of one year or
more of imprisonment or detention". The term thus combines the approaches permitted by R.l.

206. As was noted earlier, by virtue of Art. 7 of Act No. LXXI on the sources of law of 1 October
2008 (see Annex XII) the Italian Criminal Code, as it stood at the time of the Lateran Treaty in
1929, applies within the HS/VCS unless modified by a subsequent enactment. It was confirmed in
the course of the November MONEYVAL on-site visit that changes to the Italian Criminal Code
are not automatically adopted. Developments in Italian law, and more widely, are monitored and
modernising legislation is enacted in the HS/VCS on an ad hoc basis.

54

207. For this reason those responsible for drafting Chapter II of Act No. CXXVII of December
2010, entitled "criminal provisions in matters of money laundering", also had to address gaps in
the CC as revealed by a comparison with, inter alia, the designated categories of offences
contained in the Glossary to the FATF Recommendations. A substantial modernising effort was
required in this regard the fruits of which were included in Chapter III (entitled 'other offences').
As was stated in the mutual evaluation questionnaire "The reform of the Vatican criminal law was
also an opportunity to introduce criminal offences and sanctions according to the relevant
international and regional standards". Further progress in this regard was recorded in Chapter III
of the January 2012 Law.

208. The HS/VCS authorities have compiled a compliance table in which they indicate the offences
in domestic legislation which relate to the FATF categories as set out in the Glossary. This is
reproduced at Annex II. As will be seen there is now substance coverage within the HS/VCS legal
system of all the categories in question. Given the context set out above this is a substantial
achievement.

209. Art. 421 bis (4) directly addresses the issue of extraterritoriality. It is worded as follows: "The
crime of money laundering exists even when the currency, funds or other assets that proceed from
the predicate offence committed in another State". Criterion 1.5 is therefore satisfied.

210. As noted earlier, one of the goals of the December 2010 approach to money laundering
criminalisation was that, unlike the situation in Italy, it should be extended to self-laundering.
This policy was retained in the revisions introduced in January 2012. Art. 421 bis (3) states, in a
manner consistent with criterion 1.6, that: "The crime of money laundering exists even when its
author is the same person who committed the predicate offence".

211. The CC applicable within the HS/VCS makes provision for a range of ancillary offences. The
mutual evaluation questionnaire notes, inter alia, aiding and abetting (Art. 225) and attempt (Arts.
61-62). Subsequently the attention of the evaluators was also drawn to Arts. 63-66 (complicity)
and Arts. 248-251 (criminal association). As noted previously Art. l(4)(b) of the Law of January
2012 specifically defines money laundering by reference to a broad range of ancillary offences.
The drafting of this provision was inspired by Art. 9(1 )(d) of the Warsaw Convention. It should
be noted that while Article 1 (4)(b) does not refer to conspiracy it does address association. This is
consistent with criterion 1.7. Similarly, the formulation used does not directly list facilitation as
an ancillary offence. However, the evaluators are satisfied that the relevant ground is
appropriately covered by, inter alia, the concepts of aiding, inciting, counselling and abetting.

212. Paragraphs 5 to 8 of Art. 421 bis address issues of confiscation, provisional measures and like
matters. These provisions are treated, in the main in the analysis of R.3 below.

213. The second and final provision in Chapter II on "criminal provisions on money laundering" is
Art. 3 bis. This is headed "use of proceeds from criminal activities". It creates a new Art. 421 ter
of the Criminal Code and is worded in full as follows:

1. Whomever uses in economic or financial activities currency, funds, or other assets, that
proceed from a crime; shall be punished with four to twelve years of imprisonment and
with a fine ranging from €1,000 to €15,000.

2. In case of a conviction, paragraphs 5, 6, 7 and 8 of the preceding article apply.

214. Motivated in part by the close relationship with Italy the scope of this Article overlaps but
does not fully coincide with that on money laundering. Importantly it does not require proof of
any specific intent or purpose. It thus goes beyond the requirements contained in the relevant
FATF standards.

Recommendation 2

55

215. The offence of money laundering in the HS/VCS applies to natural persons who knowingly
engage in proscribed activities. The evaluators were informed that under applicable general
principles and rules of the legal system the intentional element of the offence can be inferred from
objective factual circumstances.

216. At the time of the MONEYVAL on-site visit in November 201 1 there was no criminal liability
for legal persons as, in the view of the authorities, this appeared to be inconsistent with
fundamental principles of domestic law. The authorities pointed, in particular, to the centrality of
this concept in Canon Law (see e.g. Canon 1311). It is of importance to note that in the legal
system of the HS/VCS that this is the first nominative order and first criterion of interpretive
reference (see Acts on Sources of the Law Art 1(1)). At that stage, the evaluators voiced their
concerns that the Act of December 2010 did not appropriately provide for civil or administrative
liability of legal persons for money laundering as required by criterion 2.3. In this regard they
noted that while Art. 42 of that Act specifically provided for the imposition of administrative
sanctions for violations of various provisions, these did not apply to money laundering as such.
This was a significant deficiency in terms of the satisfaction of R.2.

217. In the immediately subsequent period the authorities of the HS/VCS reconsidered this
approach. As a consequence the decision was taken to insert a provision on "administrative
responsibility of legal persons" in the amended legislation which entered into force on 25 January
2012. This applies to money laundering (Art. 421 bis) and the financing of terrorism (Art. 138
ter). Paragraph 1 of Art. 42 bis is central to the approach adopted and is worded thus:

1. In case of a conviction for one of the crimes set forth in Arts. 421 bis and 138 ter of the
Criminal Code, the judicial authority shall impose a pecuniary administrative sanction
ranging from €20,000 to €2,000,000 to the legal person involved if:

a) the person convicted exercised its legal representation, administration, direction, or a
similar role;

b) the person convicted was under the direct responsibility, supervision or control of one on
the persons referred to in paragraph a);

c) the crime was committed in favour of the legal person.

218. Paragraph 2 of Art. 42 bis articulates various grounds which act so as to exclude liability.
Paragraph 3 sets out the aggravating circumstances which will give rise to the additional sanction
of "a temporary interdict to exercise its functions". Paragraph 4 clarifies that relevant financial
sanctions shall be acquired by the Holy See and be utilised for the charitable and religious works
of the Roman Pontiff.

219. Art. 42 bis (5) states that this form of liability does not apply, inter alia, to domestic public
authorities. The term public authority is defined in Art. 1(2) as "an organism or entity that, on the
basis of the domestic legal system, performs, directly or indirectly, an institutional activity
inherent to the sovereign authority". A legal person is then defined (Art. 1(3)) as "any legal
person, regardless of its nature and activity, including foundation and trusts, that do not fall within
the definition of Public Authority".

220. Given that a public monopoly regime is said to prevail within the VCS the evaluators, when
they returned in March 2012, sought clarification of the nature and extent of the exemption
afforded by Art. 42 bis (5). It was explained that in effect the distinction drawn between "legal
persons" and "public authorities" in this context was a functional one broadly similar in character
to that made between sovereign and non-sovereign acts in the modern international law of State
immunity. The evaluators drew comfort from the oft repeated assurance by the authorities of the
HS/VCS - and its specific reassertion by the President of the Tribunal - that the exemption in
question would not apply to an obligated financial institution such as the IOR.

221. While the insertion of Art. 42 bis in the Law of January 2012 represents progress in the
satisfaction of the requirement of R. 2 it should be stressed that the liability in question is strictly

56

circumscribed. In particular it is predicated upon the prior securing of a criminal conviction of a
natural person with relevant ties to the legal person in question for either money laundering or the
financing of terrorism. While such a precondition is technically consistent with R.2 it does
severely limit the possibilities of having recourse to this provision in practice.

222. As noted above the basic sanction set by Art. 42 bis (1) is a pecuniary one of between €20,000
and €2,000,000. In so far as natural persons are concerned Art. 421 bis stipulates that money
laundering shall be punished with four to twelve years of imprisonment and with a fine ranging
from €1,000 to €15,000. As will be seen in relation to R3 confiscation of proceeds in such cases is
mandatory. The evaluation team is of the view that within the circumstances prevailing in the
VCS these penalties can be regarded as effective, proportionate and dissuasive.

Recommendation 32 (money laundering investigation/prosecution data)

223. As of the date of the conclusion of the MONEYVAL on-site visits there had been no
investigations, prosecutions or convictions for money laundering. However, the Tribunal of the
HS/VCS is charged with keeping comprehensive statistical data on all criminal matters and the
Promoter of Justice reports and comments on the same at the commencement of every judicial
year. This system applies in the current context.

Additional elements

224. As noted above, paragraph 4 of Art. 421 bis criminalises money laundering even where the
predicate activities are performed in another country. Double criminality is not included in the
text as a specific restriction on the operation of this provision. In the view of the President of the
Tribunal, this provision, properly construed, applies even in the circumstances set out in criterion
1.8.

Effectiveness and efficiency

225. In the course of their discussions with the relevant authorities of the HS/VCS at the time of the
MONEYVAL on-site visits the evaluators noted a generally high level of awareness of the new
Act and of the criminalisation provisions for money laundering contained in it. However, in the
absence of any investigations, prosecutions or convictions since its entry into force the team is not
in a position to conclude that it is effective in practice.

2.1.2 Recommendations and comments

226. The legislative drafting technique used in January 2012 to give effect to the criminalisation of
money laundering has brought added clarity to the formal satisfaction of the requirements of R. 1
by the HS/VCS. Furthermore, by virtue of the definition of money laundering in Art. 1(4) it is
clear that it is an autonomous offence separate and distinct from Art. 421 on receiving. Indeed the
latter is listed as a money laundering predicate offence (Art. 1(5)). That said in the view of the
evaluators the authorities should consider how best to further clarify the relationship between
these two Arts, of the Criminal Code where the scope of coverage overlaps.

227. In so far as R.2 is concerned the evaluators have concerns as to the manner in which Art. 42
bis on administrative responsibility of legal persons has been made contingent on securing a prior
criminal conviction of a natural person for money laundering. They urge the appropriate
authorities to revisit this issue in the light of experience with the functioning of the legislation and
to reassess at that time whether an appropriate balance of interests has been struck.

2.1.3 Compliance with Recommendations 1 and 2

Rating

Summary of factors underlying rating

R.1

LC

• Effectiveness concerns.

57

R.2

LC

• The evaluators have concerns regarding the effectiveness of the
corporate liability provisions.

2.2 Criminalisation of Terrorist Financing (SR.II)

2.2.1 Description and analysis

Special Recommendation II

228. As was noted in the analysis of R.l above, the drafters of Act No. CXXVII of December 2010
in addition to crafting a provision on the criminalisation of money laundering also took advantage
of the opportunity to modernise the criminal law of the HS/VCS in order to better reflect
international and regional standards and expectations. One such area was that of terrorism
including terrorist financing.

229. Arts. 4 to 7 of the original AML/CFT Law added new provisions to the Criminal Code in a
Chapter entitled "Other measures to prevent and counter the financing of terrorism". Art. 1 of the
Act included several definitions of relevance in this context. Paragraphs 8 and 9 are particularly
worthy of note for present purposes. They define "financing of terrorism" and "misconduct for
terrorist purposes" respectively.

230. It will be noted that Art. 1(9) defined "misconduct for terrorist purposes" in part by reference
to "conventions or other regulations of international law binding for the state". However, and for
the reasons discussed in the treatment of R.35 and SR.I at a later stage of this report, the HS/VCS
was not, at the time of the MONEYVAL on-site visit, a party to the UN Terrorist Financing
Convention. This deficiency was cured in January 2012, within two months of the end of the
MONEYVAL on-site visit, when the HS/VCS deposited its instrument of accession to this
important multilateral treaty. However it is still not a party to any of the counter-terrorism
Conventions listed in the annex to that instrument. The authorities accordingly formulated a
declaration pursuant to Art. 2(2) of the Convention. By virtue of this declaration its "accession
does not constitute consent to be bound by or to become a party to any of the treaties listed in the

Annex to the Convention [F]or the purposes of Art. 2.2(a) of the Convention, none of them

should be deemed to be included within the scope of Art. 2.2(a) of the Convention".

23 1 . Notwithstanding that this is entirely in line with the Convention, this raises difficulties in the
context of the interpretive note to SR.II. This defines "terrorist act" in part by reference to
offences within the scope of, and as defined in, those treaties 33 .

232. While the HS/VCS was not at the relevant time formally bound by the Terrorist Financing
Convention its influence can be seen in the drafting of certain provisions of Act No. CXXVII of
2010. For instance, the definitions of "funds" and "assets" in Art. 1(31) and (32) resonate with the
approach taken in Art. 1(1) of the Convention.

233. While the relevant definitions within the Act could be seen to have paved the way for the
domestic implementation of a terrorist financing offence broadly reflective of Art. 2(1 )(b) of the

33 Subsequent to the second MONEYVAL on-site visit, the HS/VCS Authorities informed the evaluators that an
in-depth analysis of the substantive provisions of the VCS Criminal Code had been initiated with the view to
identify areas where the VCS substantive Criminal Law requires amendment. As part of this process, it had been
decided to incorporate into the Criminal Code a set of definitions of crimes, including those crimes described in
the various conventions referred to in the annex to the 1999 Terrorist Financing Convention. Moreover,
HS/VCS authorities are actively considering ratification of some of the aforementioned treaties.

58

Terrorist Financing Convention the evaluators harboured concerns that this goal may not have
been adequately achieved by the substantive provisions as drafted. Among other problematic
issues the evaluators noted the absence of a sufficiently focused treatment of the extraterritorial
aspects of terrorist financing and the lack of treatment of criminal, civil or administrative liability
for terrorist financing by legal persons.

234. Following the end of the November 2011 MONEYVAL on-site visit the HS/VCS authorities
decided to review the adequacy of the legislative approach which had been taken to terrorist
financing. The outcome of this consideration was the introduction of a range of relevant
amendments in the Law of January 2012 designed to better reflect the expectations of SR. II.

235. Central to the approach adopted in the revised legislative scheme is Art. 4 bis entitled
"financing of terrorism". This inserts into the Criminal Code Art. 138 ter, paragraphs 1 and 2 of
which are worded as follows:

1. Whomever by any means, unlawfully and wilfully, directly or indirectly, collects, provides,
deposits or holds currency, funds or other assets, however obtained, with the intention that
they should be used or in the knowledge that they are to be used, in full or in part, in order
to commit one or more acts for a terrorist purpose or to abet the commission of one or more
acts for a terrorist purpose, regardless of whether those funds or assets are used to commit
or to attempt to commit those acts, shall be punished with five to fifteen years of
imprisonment.

2. The crime exists whether the acts are directed to finance associations or whether they are
directed to finance one or more natural persons.

236. According to Art. 1(6) "acts performed for a terrorist purpose" means:

. . . acts intended to cause death or serious bodily injury to civilians or to persons not taking
active part in hostilities in cases of armed conflict, when the act, by its nature or context, is
carried out with the intent to:

a) intimidate a population;

b) compel the public authorities or an international organisation to do or to abstain from
doing any act.

237. It is of importance to note that for the purposes of the Law of January 2012 the concept of
"terrorist financing" extends beyond those matters provided for in Art. 138 ter. In particular, the
concept includes, by virtue of Art. l(8)(b) "participation in one of the acts referred to in Art. 138
bis of the Criminal Code, association to commit, attempt to commit, and aiding, inciting, or
counselling the commission of such act, or abetting its execution.". This provision of the Criminal
Code is inserted by Art. 4 of the 2012 Act and is headed "associations for terrorist purposes or
subversion". Paragraph 1 reads:

Whomever promotes, creates, organises, or directs associations that intend to commit acts for a
terrorist purpose or for the purpose of subversion, shall be punished with five to fifteen years
of imprisonment.

238. These provisions, inspired by the Terrorist Financing Convention, are generally consistent
with some of the exacting expectations of criterion II. 1(a). However, as noted above the HS/VCS
has not yet become a party to any of the treaties listed in the Annex to the Convention and has
not, as such criminalised on a systematic basis offences within the scope of and as defined in
those instruments (though Art. 8 on acts of terrorism with explosives or other lethal weapons or
devices was inspired by the Terrorist Bombings Convention). To that extent the law of the VCS
does not as yet fully reflect the definition of "terrorist Act" contained in the Interpretative Note to
FATF SRII.

59

239. However, the HS/VCS authorities advised that reliance can be placed on the procedure
provided by Art. 9 of Act No. LXXI on the Sources of Law of 1 October 2008 which states
"Should any penal provision be lacking, and an act has been committed that offends the principles
of religion or morals, public order, personal security or safety of things, the judge may refer to the
general principles of the legislation to inflict pecuniary penalties up to €3,000, or detention
penalties up to six months, and apply, as the case may be, the alternative sanctions indicated in
Law of 14 December 1994, No. CCXXVII". While this has been utilised in the drugs area its
application in the context of terrorist financing has never been tested.

240. Art. 138 ter (1), as we have seen, utilises the terminology "currency, funds or other assets,
however obtained ...". This wording thus catches funds etc. whether of legitimate or illegitimate
provenance as required by criterion 11.1(b). Furthermore, the terms currency, funds, and other
assets are specifically and appropriately defined in Art. 1(10), (11) and (12) respectively.

241. The terrorist financing offence as embodied in Art. 138 ter (1) of the Criminal Code does not
require that the currency, funds or other assets were actually used to carry out or attempt a
terrorist act or be linked to a specific terrorist act. This conclusion flows from the specific
wording utilised ("regardless of whether those funds or assets are used to commit or attempt to
commit those acts"). The expectations of criterion II. 1(c) are therefore satisfied. It is also an
offence to attempt to commit the offence of terrorist financing. This conclusion is confirmed as
accurate by the HS/VCS authorities, and is reinforced by Arts. 61 and 62 of the Criminal Code
(see also Canon 1328). However, financing of individual terrorists or terrorist organisations for
legitimate purposes is not covered by the legislation.

242. As was noted in the context of R.l above the Criminal Code of the VCS makes provision for a
range of other ancillary offences including Arts. 63-66 (complicity) and Arts. 248-251 (criminal
association). Also of relevance in this context is the fact, as noted previously, that under Art.
l(8)(b) of the January 2012 Law "terrorist financing" is extended to include participation in one
of the acts covered by Art. 138 bis ("associations for terrorist purposes or subversion") as well as
"association to commit, attempt to commit, and aiding, inciting, or counselling the commission of
such act, or abetting its execution".

243. By virtue of Art. 1(5) of the Law of January 2012 all of the offences relating to terrorism
which it addresses, including Arts. 138 bis and ter on terrorist financing, are specifically listed as
predicate offences for money laundering. This satisfies the requirement of criterion II.2.

244. Similarly the Act directly addresses issues of extraterritoriality in a terrorist financing context.
Art. 138 ter (3) is worded as follows:

3. The terrorist purpose is present even when the violent acts are directed against another
State, or an international institution or organisation, or when they are committed in
another State.

The evaluators were informed that under applicable general principles and rules of the legal
system the content and element of these offences can be inferred from objective factual
circumstances (see, e.g., Canon 1321(3)).

245. Art. 138 bis (2) is to the same effect.

246. As was noted in the earlier discussion of R. 2, the Law of January 2012 introduced, in Art. 42
bis, a provision on administrative responsibility of legal persons for both money laundering and
the financing of terrorism. This liability is predicated upon the securing of a prior criminal
conviction of a natural person for, in this context, a terrorist financing offence. Such an exacting
precondition is not, however, explicitly prohibited by the relevant international standards.

Recommendation 32 (terrorist financing investigation/prosecution data)

247. As of the time of the MONEYVAL on-site visits there had been no investigations,
prosecutions or convictions for terrorist financing within the HS/VCS. However, the Tribunal is

60

charged with keeping comprehensive data on all criminal matters, and the Promoter of Justice has
an annual reporting obligation in respect of the same.

Effectiveness and efficiency

248. In the absence of relevant investigations, prosecutions and convictions the evaluation team is
unable to conclude that the system introduced by the Act in December 2010 and amended in
January 2012 is effective in this sphere.

2.2.2

Recommendations and comments

249. The HS/VCS is to be commended in having taken significant legislative steps to address the
complex criminal justice issues which arise in the context of the financing of terrorism. However,
some work remains to be done in order to ensure full, clear and effective compliance with the
requirements of FATF SR.II. As mentioned above the major issue, arises from the current stance
of non-participation in the global counter-terrorism Conventions listed in the Annex to the UN
Terrorist Financing Convention. Even if reliance can be placed on Art. 9 of Act No. LXXI on the
Sources of Law of 1 October 2008 designed to address lacuna in the system of criminal law it
would in the view of the evaluators be better for these matters to be addressed directly in the
Criminal Code and for appropriate sanctions to be specified therein. Furthermore, the financing of
individual terrorists or terrorist organisations for legitimate purposes is not explicitly covered in
the current legislation 34 .

250. As noted above, the evaluators have concerns as to the manner in which Art. 42 bis on
administrative responsibility of legal persons has been made contingent on securing a prior
criminal conviction of a natural person for money laundering. This provision also applies in a
terrorist financing context. Notwithstanding Art. 5 (1) of the Terrorist Financing Convention the
evaluators urge the appropriate authorities to revisit this issue in the light of experience with the
functioning of the legislation and to reassess at that time whether an appropriate balance has been
struck.

2.2.3

Compliance with Special Recommendation II

Rating

Summary of factors underlying rating

SR.II

LC

• Absence of specific criminalisation of financing in respect of certain
terrorist acts in the relevant UN counter-terrorism conventions annexed
to the Terrorist Financing Convention.

• Financing of individual terrorists or terrorist organisations for
legitimate purposes not covered.

2.3 Confiscation, Freezing and Seizing of Proceeds of Crime (R.3)

34 In the plenary meeting the HS/VCS authorities expressed their commitment to incorporate explicitly in the
Criminal Code each of the crimes set forth in the UN counter-terrorist conventions and will address the issue of
financing of individual terrorists or terrorist organisations for legitimate purposes within the meaning of the
FATF standards.

61

2.3.1 Description and analysis

Recommendation 3

251. As was seen in the analysis of Rl above, Art. 3 of the Law of January 2012 inserts a
somewhat revised provision on money laundering into the Criminal Code as Art. 421 bis. This
includes specific coverage of mandatory confiscation of both proceeds and instrumentalities in
that context. Paragraphs 5 and 6 are central to the approach adopted and are worded thus:

5. In the case of conviction, the judge shall order the confiscation of:

a) The proceeds of the money laundering, including the instrumentalities used or
destined for that purpose;

b) The profits or other earnings originating, directly or indirectly, from the
proceeds of the predicate offence.

6. Whenever it is not possible to confiscate the goods referred to in paragraph 5,
subparagraphs a) and b), the judge shall order the confiscation of currency, funds or other
assets of an equivalent value among those owned or possessed, directly or indirectly,
exclusively or jointly with others, by the convict, without prejudice to the bona fide rights
of third parties.

252. Paragraph 2 of Art. 421 ter on use of proceeds from criminal activities explicitly adopts these
provisions. This wording is crafted in such a way as to satisfy, within this context, the
requirements of criterion 3.1.

253. The Law of January 2012 similarly makes provision for mandatory confiscation following
upon conviction for terrorist financing. Paragraphs 4 and 5 of Art. 138 ter reads as follows:

4. Regarding the person convicted, the confiscation of the goods used or intended to be
used to commit the offence, their value, proceeds, profits, and other earnings, is
always mandatory, without prejudice to the bone fide rights of third parties.

5. Whenever it is not possible to confiscate the goods referred to in paragraph 4, the
judge shall order the confiscation of currency, funds or other assets of an equivalent
value among those owned or possessed, directly or indirectly, exclusively or jointly
with others, by the convict, without prejudice to the bona fide rights of third parties

254. Art. 138 bis (3) and (4) adopt the same approach.

255. The position in respect of the confiscation of the proceeds and instrumentalities of other
predicate offences other than piracy (see, Law of January 2012, Art. 23 bis) is somewhat less
clear cut.

256. Art. 3 of the 2010 AML/CFT Law was the sole provision of Chapter II entitled "criminal
provisions in matters of money laundering". Art. 421 bis came under the heading in the Criminal
Code "about laundering and self -laundering". Notwithstanding the possible restrictive inferences
to which such language might give rise the authorities of the HS/VCS with whom the team met in
November 2011, including the Promoter of Justice and the President of the Tribunal of the
HS/VCS, were unanimous in the view that paragraph 6 on confiscation was not confined in its
scope to mandating the confiscation of the proceeds of money laundering. Under this view
confiscation was also provided for in respect of predicate offences. In their view this
interpretation was reinforced and placed beyond doubt by the wording of paragraph three of the
same article. This interpretation had not been formally confirmed by the judiciary in practice. The
attention of the evaluators was not at that time drawn to any pre-existing provisions of the law of
the HS/VCS governing the confiscation of criminal proceeds as such.

62

257. It is relevant to note in this context that the final paragraph of Criminal Code Art. 138 bis,
inserted by Art. 4 of the original AML/CFT Law, also makes explicit mention of mandatory
confiscation in, inter alia, the financing of terrorism context. On the basis of the interpretation
advanced in the previous paragraph one assumes that this was explicitly stipulated for other
reasons.

258. A very similar analysis of this issue was advanced by the authorities of the HS/VCS in
relation to the amended version of Art. 421 bis. In this regard particular stress was placed on the
wording of paragraph 5(b) reproduced above. It also appeared to the evaluators that Art. 421 ter
might facilitate the confiscation of the proceeds of predicate offences in instances where these are
used "in economic or financial activities". Given the concerns expressed by the evaluators as to
the lack of clarity of the legal system of the HS/VCS over the availability of confiscation in
several areas of relevance to Recommendation 3, including its extension to indirect proceeds, to
laundered proceeds and to the proceeds of predicate offences other than those for which specific
provision had been made in the January 2012 Law, the authorities requested that the Pontifical
Commission for the VCS address the matter and issue an authentic interpretation concerning the
powers of confiscation held by the judge in criminal matters. This was issued in May 2012 and is
reproduced in full at Annex XXXV. The Pontifical Commission concluded as follows:
"Considering Articles 166, par. 1; 237, par. 1; and 612, par. 1, of the Code of Criminal
Procedure; as well as Article 421 bis, §§. 5, 6, 7 and 8 of the Criminal Code; the judge possesses
the power to order confiscation of the proceeds, direct and indirect, of all predicate offences of
money laundering, and likewise the power to order confiscation of currency, property and other
assets which are the object of laundering in a criminal process dealing with the crime of
laundering. The power to order confiscation extends to the currency, property and other assets of
equivalent value, whenever the currency, property and assets are owned or possessed, exclusively
or jointly with others, directly or indirectly, by the convict, without prejudice to the bona fide
rights of third parties."

259. Provisional measures, including the freezing and/or seizing of property, to prevent any
dealing, transfer or disposal of property subject to confiscation were not addressed in Act No.
CXXVII of 2010 (save in relation to certain measures relevant to Security Council Resolutions in
a SR.III context). For such matters reliance had to be placed on various provision of the Italian
Code of Criminal Procedure of 1913 which, as noted elsewhere, applies by virtue of Art. 8 of the
Act on the Sources of Law of 2008.

260. In this regard the HS/VCS authorities pointed to the following provisions of the CCP: Arts.
166, 170, 233-234, and 606-617. These are reproduced, for ease of reference, at Annex XV
Broadly speaking these, in combination, can be regarded as creating a system for the sequestration
of goods used to commit a crime and those which are the product of crime. None explicitly
empowers the courts or other competent authorities to order that bank and financial records be
made available or be seized.

261. The Law of January 2012 introduced some welcome assistance in this area. In particular
according to paragraph 8 of Art. 421 bis "The judge shall adopt precautionary measures, including
the seizure of the currency, funds or other assets likely to be confiscated, to prevent their sale,
transfer or disposition, as well as other measures to enable the competent authorities to identify,
trace, and freeze the currency, funds or other assets likely to be confiscated without prejudice to
the bona fide rights of third parties." This provision also applies to the use of the proceeds of
crime (Art. 421 ter (2)). The Act also introduces specific coverage to like effect in the area of the
financing of terrorism (Art. 138 bis (6) and Art. 138 ter (7)).

262. In the course of the evaluation process the HS/VCS authorities confirmed that the general
principles and rules of the legal system allow the initial application to freeze or seize property
subject to confiscation to be made ex-parte and without prior notice. Art. 24(2) of the January
2012 Law makes specific provision of this kind but only in a SRIII context.

63

263. The evaluators are satisfied that law enforcement agencies and the FIU have adequate powers
to identify and trace property that is or may become subject to confiscation or is suspected of
being the proceeds of crime.

264. The system of confiscation and of provisional measures outlined above contain wording
designed to protect the interests of bona fide third parties.

265. In so far as criterion 3.6 is concerned the authorities of the HS/VCS informed the evaluation
team that the Promoter of Justice may, under Art. 1 1( 1) of the Code of Civil Procedure request the
court to cancel a contract "in the public interest". The evaluators are not aware of any use of this
provision in practice. The authorities did not, however, point to any authority to prevent or void
actions outside of the contractual sphere where the persons involved knew or should have known
that as a result of those actions the authorities would be prejudiced in their ability to recover
property subject to confiscation.

Additional elements

266. The evaluators were advised that by virtue of interaction of Arts 248 & 249 of the CC and Art.
612 of the CCP there is some limited capacity within the legal system of the HS/VCS to
confiscate the property of organisations that are found to be primarily criminal in nature. However
at the present time the legal system of the VCS does not address the criteria of Additional
Elements 3.7 b 7 c.

Recommendation 32 (confiscation investigation/prosecution data)

267 '. No provisional measures had been applied and thus no statistics were available.
Effectiveness and efficiency

268. The authorities of the HS/VCS provided the evaluators with data on judicial practice on
freezing & confiscation from 1984 to the present date. The greater part reveals an ability &
willingness to use provisional measures in appropriate cases. However, insofar as confiscation is
concerned the practice prior to the new law related to instrumentalities. The confiscation regime
as amended by the Law of January 2012 has not been in place for a sufficient period of time in the
VCS to generate judicial practice.

269. As the revised AML/CFT Law was only adopted on 25 January 2012, it was not possible for
the evaluators to assess the effectiveness of its application.

2.3.2 Recommendations and comments

270. While the evaluators welcome the clarification of the nature and scope of the powers of
confiscation provided by the Pontifical Commission they are of the view that there would be
substantial merit in enacting a detailed, comprehensive and modern legislative scheme to address
the range of issues, including provisional measures, which arise in the context of this important
international standard. They urge the authorities of the HS/VCS to consider this possibility in due
course.

271. Steps should also be taken in a timely manner to ensure that the requirements of criterion 3.6
on the authority to take steps to prevent or void actions are more fully satisfied.

2.3.3 Compliance with Recommendation 3

Rating

Summary of factors underlying rating

R.3

LC

• Lack of comprehensive authority to prevent or void actions (c.3.6).

• Effectiveness concerns.

64

2.4 Freezing of Funds Used for Terrorist Financing (SR.III)

2.4.1 Description and analysis

Special Recommendation III

272. Chapter IV of Act No. CXXVII of 30 December 2010 was entitled "measures to prevent the
financing of terrorism and implement the freezing of funds and assets". Its three substantive Arts,
create a framework through which the HS/VCS would seek to give effect to the terms of SR.III.
The FIA lay at the heart of the system so created.

273. Art. 24(1) of the Act, was central to the approach adopted to freezing under relevant UN
Security Council Resolutions. It was worded thus:

In order to enforce measures of freezing of funds and assets for the purposes of
countering and repressing the financing of terrorism and the activities of countries that
threaten international peace and security, the Financial Intelligence Authority, except
for the provisions adopted by the judiciary authority in criminal matters, orders by its
own provision the freezing of funds and assets held by natural and legal persons,
groups or entities, designated according to the principles and rules in force within the
European legal system. By the same provision, exemptions from such freezing are
identified on the basis of the principles and rules in force within the European legal
system.

274. Several of the terms utilised in Art. 24(1), including the "financing of terrorism", "funds",
"assets", "freezing of funds" and "freezing of assets" were defined in Art. 1.

275. As can be seen clearly from its wording, the approach favoured by the drafters of Art. 24(1)
for the satisfaction of this dimension of SR.III was an indirect one intended to incorporate "the
principles and rules in force within the European legal system". It was confirmed during the
MONEYVAL on-site visit in November 2011 that by "European legal system" was meant that of
the European Union. The authorities also confirmed that this critical provision required
subordinate implementing legislation to give it full force and effect. This was in preparation at the
time of the MONEYVAL on-site visit.

276. The effects of the freezing of funds and assets pursuant to Art. 24(1) were set out in some
detail in Art. 25. The reporting obligations of obligated entities were set out in Art. 26. At the time
of the MONEYVAL on-site visits, however, the FIA was in the process of drafting a specific
regulation which would be designed to create an effective system through which it could
communicate relevant freezing actions to the financial sector. In this regard it should be noted that
Art. 3(3) of FIA Regulation No. 5 (see Annex XXI) is based on a list of designated persons being
available for consultation on its website. Guidance to the financial sector concerning their
obligations was also said to be under development.

277. Following the November 2011 MONEYVAL on-site visit the authorities of the HS/VCS
decided to reconsider the nature of the above approach to the satisfaction of the relevant
international standards in this important area of concern. Those deliberations were to result in the
introduction of significant legislative amendments in the Law of January 2012. These are set out,
in the main, in Chapter IV of the Act entitled "measures to prevent and counter the financing of
terrorism". This consists of four detailed substantive provisions: namely, measures to counter the
financing of terrorism and the activities that threaten international peace and security (Art. 24);
the effects of the freezing of funds and assets (Art. 25); reporting requirements (Art. 26); and, the
custody, administration and management of the frozen assets (Art. 27). Several relevant terms,
including "to freeze" and "designated persons" are defined in Art. 1 .

65

278. The first point to note about the revised legislative scheme is that, while the FIA retains a
significant role, responsibility for SR III issues is now shared among a broader group of actors. In
particular, the Secretariat of State is afforded a position of some centrality. This is reflective of its
long established general responsibility for the conduct of international affairs and its new
responsibilities for anti-money laundering and terrorist financing policy embodied in Art. 2
quinquies of the January 2012 Law. This new reality is clearly illustrated in Art. 24 of that Act. It
reads as follows:

1 . In order to prevent and counter the financing of terrorism and the activities that threaten peace
and international security, the Secretariat of State shall draw up a list of designated persons
subject to the freeze of funds and economic assets on the basis, inter alia, of the relevant
United National Security Council resolutions.

The Secretariat of State shall update the list of designated persons, and possibly remove
persons from that list, on the basis, inter alia, of the relevant United Nations Security Council
resolutions.

2. The Financial Intelligence Authority, by its own provision, without delay and without giving
previous notice, orders the freeze of the funds and other assets owned or possessed,
exclusively or jointly, directly or indirectly, by the persons designated by the Secretariat of
State.

The ordered freeze shall be communicated without delay to the subject referred to in Art. 2,
paragraph 1 , and has immediate effect.

The Financial Intelligence Authority's order shall define the terms, conditions and limit of the
freeze of funds, also to protect the bona fide rights of third parties.

3. The Secretariat of State shall:

a) acquire, both from domestic and international competent authorities, any information
that might be useful to fulfil the tasks set forth in paragraph 1 ;

b) maintain contacts with foreign and international authorities with the view to enhance
the indispensable international co-ordination;

c) propose to the competent international authorities the designation of additional
persons.

Whenever there are, on the basis of the information gathered pursuant to
subparagraphs a) and b), sufficient elements to propose to the international authorities
the designation of additional persons, and there is a risk that the funds and other
assets subject to the freeze might be concealed or used to finance terrorism, the
Secretariat of State shall inform the Promoter of Justice and the Financial Intelligence
Authority for the adoption of precautionary measures.

d) propose to the International Authorities the delisting of designated persons, even on
the basis of the recourses filed by the entitled persons pursuant to paragraph 4.

4. The Tribunal shall receive and assess the applications for exemption from the freezing of
funds and other assets filed by the entitled persons, also to protect the bona fide rights of third
parties.

279. It is clear from the above that the primary point of reference for the new legislative approach
is the practice of the UN Security Council rather than that of the European Union. However, the
use of the terminology "inter alia" in Art. 24(1) leaves open the possibility of taking account of
designations carried out by other authorities including the EU. This possibility was confirmed in
discussions held with colleagues in the HS/VCS in March 2012.

280. Pursuant to paragraph 1 the responsibility to draw up a list of designated persons falls to the
Secretariat of State. Within the time frame relevant to this evaluation no such list had been

66

finalised. The evaluators were, however, informed that it was in the course of preparation 35 . Upon
the finalisation of a list of designated persons by the Secretariat of State it is provided to the FIA.
Under paragraph 2 that authority "by its own provision, without delay and without giving
previous notice" orders the freezing of the funds and other assets in question. This order is then to
be communicated by the FIA to all obligated entities listed in Art. 2(1). This is to be done
"without delay". The freezing order has "immediate effect".

281. While the scheme has yet to be activated in practice, the framework provided by the
interaction of paragraphs 1 and 2 of Art. 24 appear to be sufficient to satisfy the expectations of
criterion III. 1 which relates to UN Security Council Resolution 1267 (1999) and its successor
resolutions.

282. Art. 24 (1) provides the legal authority for the creation of an autonomous HS/VCS list. Given
the drafting style adopted in Art. 24(1) and (2) it appears to the evaluators that they also form a
basis upon which the HS/VCS could give effect to the freezing of funds or other assets of persons
designated by "international" bodies such as the EU and by third states pursuant to UN Security
Council Resolution 1373 (2001).

283. The freezing actions authorised by Chapter IV of the January 2012 Law are extensive in
nature. They extend to "the funds and other assets owned or possessed, exclusively or jointly,
directly or indirectly" by a designated person (Art. 24(2)). As noted at an earlier stage of this
report the terms "funds" and "other assets" are broadly defined in paragraph 11 and 12 of Art. 1.
Furthermore, under Art. 25(4) it is "forbidden to provide, directly or indirectly, funds or other
assets to the designated persons, or to devote those funds and assets to their benefit".

284. As was noted above, under Art. 24(2) the FIA is required to bring all freezing orders in respect
of designated persons to the attention of obligated entities without delay. The exact technical
manner in which this obligation will be discharged in practice was still under consideration at the
end of the time frame relevant to the preparation of this report. It is of relevance to note in this
regard that under Art. 26 obligated entities are required to report, within 30 days, to the FIA on
measures taken by them pursuant to the freezing order. This extends to:

b) any available information regarding the relationship, services and transactions, as well as any
other intelligence available, related to the designated persons or to those persons who, on
the basis of the indications that may have been received, are in the process of being
designated.

285. Guidance to financial institutions and other relevant entities concerning their obligations in
taking action under freezing measures is under preparation by the FIA.

286. The Secretariat of State is given the responsibility to propose to the competent "international
authorities" both the designation of additional persons and the delisting of such persons (Art.
24(3)(c) and (d)). It should also be noted that Art. 24(4) provides that "The Tribunal shall receive
and assess the applications for exemption from the freezing of funds and other assets filed by the
entitled persons, also to protect the bona fide rights of third parties". (See also, Art. 27(6)).

287. As was seen in relation to R.3, the HS/VCS legal system also contains general provisions to
permit the seizure and confiscation of assets in other circumstances. The drafters of Chapter IV of
Act No. CXXVII have taken care to ensure that these processes are not disturbed. Importantly this
is explicitly acknowledged in the wording of Art. 25(6).

288. As was also noted in the context of the analysis of R.3 the legal system of the HS/VCS
provides for several measures to protect the interests of bona fide third parties affected by the

35 On 3 April 2012 the HS/VCS list of designated persons was promulgated by the Secretariat of State which
covered, inter alia, the 1267 list of designated persons. On the same day the FIA issued an Ordinance giving
effect to this list and transmitted it to all obliged persons.

67

operation of the confiscation regime. A specific regulation to address such matters under Chapter
IV of the AML/CFT Law was, the evaluators were informed, in the process of being drafted 36 .

289. Finally, it will be recalled that under the January 2012 Law the FIA is charged with the
supervision of the observance of the duties established in the area of the prevention of the
financing of terrorism. Art. 42 creates an administrative pecuniary sanctions system. This applies,
inter alia, to infringements of Arts. 26 and 27 of Chapter IV.

Additional elements

290. As has been seen, the system of measures to prevent the financing of terrorism and implement
the freezing of funds and assets provided by Chapter IV of the AML/CFT Law has still to be
perfected and to be put in place in practice. It is uncertain at the time of writing the extent to
which the final scheme will address the issues raised in criteria III. 14 and III. 15.

Recommendation 32 (terrorist financing freezing data)

291. There have been no listing measures taken to date to implement the relevant UN Security
Council Resolutions. There have similarly been no instances to date in which the general criminal
justice system in relation to the confiscation of terrorist assets or associated provisional measures
has been utilised in practice.

Effectiveness and efficiency

292. As the system contemplated by Chapter IV of the Law of January 2012 has not yet been
brought into full practical force and effect it is, by definition, ineffective at this time. Given the
absence of practice under the general criminal justice provisions reviewed in relation to R.3 the
evaluators are also unable to conclude that it is effective in this context.

2.4.2 Recommendations and comments

293. The detailed legislative provisions found in Chapter IV of the January 2012 Law provide a
much improved basis from which the HS/VCS can seek to give full force and effect to the
freezing of funds and other assets in accordance with the relevant Resolutions of the UN Security
Council passed under Chapter VII of the UN Charter. This is particularly so in relation to the
listing process established by Resolution 1267 (1999) and its successor resolutions. While the
differences in approach to designation embodied in Resolution 1373 (2001) may not have been so
fully in focus the wording utilised in Art. 24 appears to form a basis for the HS/VCS to give effect
to "designations" made by the EU and other "international" bodies and by third states. It is
recommended, however, that an appropriate opportunity is sought to place this beyond doubt. It
should be noted in this context that if reliance is placed on the European Union lists then
procedures will need to be in place to cover the so called "EU internals" which are not subject to
designation as such by the European Union.

294. At the end of the evaluation period certain facilitation initiatives, including the issuing of
appropriate guidance to obligated entities, had still to be finalised. These should be completed as a
matter of priority 37 .

36 The HS/VCS authorities subsequently informed evaluators during the pre-meeting that an Ordinance was
adopted by the FIA on 3 April 2012 which addresses this matter.

37 At the time of the pre-meeting the HS/VCS authorities indicated that such guidance had been provided by the
FIA on 3 April 2012.

68

295. Finally, although Chapter IV contains limited treatment of delisting, exemptions and like
matters more needs to be done in order to create a system which is more comprehensive and
potentially effective. This is particularly the case in respect to the authorisation of access to funds
needed for basic expenses or for extraordinary expenses in accordance with Security Council
Resolutions 1452 (2002).

2.4.3

Compliance with Special Recommendation SR.III

Rating

Summary of factors underlying rating

SR.III

NC

• No designations under UNSCR 1267 or 1373 within the evaluation
period.

• Communication systems for designation were not tested within the
evaluation period.

• Lack of guidance for obligated entities.

• Lack of comprehensive coverage of delisting procedures and exemption
procedures.

• Lack of publicly known procedures for unfreezing in a timely manner
of the funds or other assets of persons inadvertently affected by a
freezing order.

• No procedures for authorising access to funds frozen pursuant to
UNSCR 1267 that have been determined to be necessary for basic
expenses.

• Recent adoption of AML/CFT Law meant that it was not possible to
assess effectiveness of implementation.

Authorities

2.5 The Financial Intelligence Unit and its functions (R.26)

2.5.1 Description and analysis

Recommendation 26

296. The Financial Intelligence Unit for the HS/VCS, is the FIA - Financial Intelligence Authority
(Autorita di Informazione Finanzaria - AIFj, which has been operational since 1 April 2011. The
unit was established by His Holiness Benedict XVI in his Apostolic letter dated 30 December
2010 in the form of a Motu proprio on preventing and countering illegal activities in the financial
and monetary field (see Annex III), giving effect to the original AML/CFT Law No. CXXVII
concerning the prevention and countering of the laundering of proceeds from criminal activities
and of the financing of terrorism Dated 30 December 2010, substituted by Decree 159 since 25
January 2012. The Motu Proprio identifies the FIA as a public institution within the HS, endowed
with the public canonical judicial personality and a Vatican civil legal personality. Its jurisdiction
in respect of AML/CFT rules extends to all Dicasteries of the Roman Curia and all the
organisations and bodies depending on the Holy See that perform the (financial) activities listed in
Art. 2 of the AML/CFT Law.

297. In addition to the key assignment of an FIU in relation to the processing of the suspicious
activity reports (SARs), the FIA has an important regulatory and supervisory role as set out in Art.
2 septies 2 a), b) & c) of the revised AML/CFT Law.

69

298. The FIA is an autonomous administrative authority, whose functions and responsibilities are
governed by the revised AML/CFT Law (in particular Art. 2 septies and 36 bis ) and its Statute
(Art. 2) (see Annex VI) as approved by the Motu proprio of 30/12/2010. Beside supervisory and
regulatory duties it exercises the key FIU functions of receiving and analysing the information it
receives in the form of a suspicious transaction report, and of disseminating the results of its
analysis:

•

Receiving : all reporting entities are under the obligation to report promptly to the FIA their

v ! S

suspicions on transactions ("transazione") that might be related to money laundering or
financing of terrorism (Art. 2 septies 3. a) & 34.1 of the revised AML/CFT Law).

• Analysing : on reception, the FIA processes the STR, basically by performing financial
analysis and using its powers of collection of relevant information, to determine if the STRs
are sufficiently founded and indicative of ML/FT (Art. 2 septies 3.b) & 36 bis 1 a) & b))

• Disseminating : once the FIA judges there are sufficient elements indicative of ML/FT, it
communicates these "facts" to the Promoter of Justice, who then decides whether to initiate a
police investigation (Art.2 septies 3.c & 36 bis l.d).

299. The FIA takes a broad view on what triggers the intervention and analysis of the FIU, as
provided for in Art. 2 septies & 36 bis of the revised AML/CFT Law. In the Italian version of
both provisions the process starts with "segnalazioni", translated as Suspicious Transaction
Reports. Yet, as the statistics show, they have opened 12 cases applying their analytical and
inquisitive powers, whereas only 1 SAR had been filed 39 . The FIA indeed puts foreign requests
and other sources of information on a par with a STR.

300. On 14 November 201 1, the FIA issued Regulation n° 5 (see Annex XXI) in implementation of
Art. 34.3 of the original AML/CFT Law. This Regulation comprehensively specifies the structure
of the STR report and the manner of reporting by means of a model form, which can be forwarded
by fax or e-mail. Emphasis is laid on the timeliness of the communication and the completeness
qua identification and relevant information. There are plans to establish an on-line reporting
system.

301. The report is structured to include :

a) identification data (the reporting person remains anonymous);

b) information concerning operations, subjects, relationships and the links between them;

c) description of the operations and suspicion grounds;

d) attached documents.

302. In support of its analytical activity the FIA has a broad power to collect additional data. To
that end the revised AML/CFT Law gives the FIA access, on a timely basis, to "the necessary
financial, administrative, investigative information" (Art. 2 septies 3.d) and "additional
information from the parties that have made the disclosure " (Art. 36 bis 1. b) 40 . There is an
overarching condition of the FIA requiring the information in order to perform its AML/CFT
assignment.

303. The inquisitive power of the FIU is very generally formulated, ensuring the authority of the
FIA covering all relevant sectors. However, compared to the previous Act, the new text raises
some issues that call for clarification and even rectification.

38 Incorrectly translated in the heading of Art. 34 as "operations" in the English version.

39 At the time of the 2 nd MONEYVAL on-site visit the total amounted to 2 STR + 8 foreign requests +
approximately 3,000 cash declarations.

40 The Italian original "... ai soggetti che hanno effettuato la segnalazione;" was incorrectly translated in English
as ". . .from the reporting parties".

70

304. First of all the absence of a clear delineation of this power may lead to controversy as to its
scope. Whilst "investigative information" commonly refers to the data managed by the
investigative authorities (i.e. the Gendarmerie), it is regrettable that the reference in the old Act to
"judicial information" was dropped 41 . Furthermore, it is not clear what exactly is covered by the
notion of "financial" and "administrative" information and, more specifically, to what databases
the FIA has access or from what entities the FIA may request additional information. At least for
the interpretation of administrative information there was guidance from the specific reference to
the "Organs of the State" in the old Art. 33.3.

305. According to the VCS authorities, the intentionally broad language allows the FIA to
determine the range of additional information depending on the specific case and the analytical
needs of the FIA. In concreto, the FIA has the power to request following information:

•

Financial information held by all subjects obliged by the AML/CFT Law and all relevant
dicasteries, institutions and entities of the Roman Curia (e.g. APSA, Prefecture for Economic
Affairs, Pontifical Council "Cor Unum" etc.). The authorities state that this would also
include information held by all legal persons and entities (including foundations) dependent
from the HS/VCS. This last assertion is however based on an overly broad interpretation of
Art. 2 septies, §3, d.

• Administrative information held by all dicasteries, institutions and entities of the Roman
Curia (e.g. Prefecture for Economic Affairs, Pontifical Council "Cor Unum" etc.).

• Investigative information held by the Gendarmerie in its databases. This category would also
include information held by the Judicial Authority, including, inter alia, investigative records,
penal cases records, rogatory letters, etc.

306. A regrettable shift between the old and new text happened to the FIA access to additional
information held by the reporting parties. Whilst the previous Art. 33.3 left no doubt that the
power to obtain additional information also related to "other subjects", i.e. to all entities subjected
to the obligation to disclose, this authority is now limited to the subjects who actually made the
STR ("soggetti che hanno effettuato la segnalazione" - Art. 36 bis Lb). This appears to deviate
from Art. 2 septies 3d) which gives the FIA the general power to collect financial information
and which the authorities consider grants them access to information held by all entities subject to
the reporting obligation 42 .

307. Furthermore, the FIA has the power to suspend suspect operations for a period of up to five
working days if it finds the transactions could be related to money laundering or terrorism
financing, on condition such freezing action does not jeopardise ongoing investigations. The
Promoter of Justice (PoJ) must then be informed immediately (Art. 2 septies 3.h) of the revised
AML/CFT Law).

308. If on the basis of its analysis of the reports the FIA finds sufficient indications, it must
communicate to the PoJ the "information" leading to a presumption of ML or TF (Art. 2 septies 3.
d) of the revised AML/CFT Law). From the tenor of the provision it appears that this power of
decision is not a discretionary one, so communication to the PoJ is mandatory as soon as the FIA
finds the information to be relevant in respect of suspected ML/TF. Furthermore, on account of
the scope of the ML offence being limited it follows that, in order to establish its jurisdiction, the
FIA needs to identify the probable predicate offence as a serious offence according to Art. 3 of the
revised AML/CFT Law - Art. 42 Ibis PC. The PoJ informs the FIA whenever he does not pursue
the FIA report (Art. 36 bis 2. of the revised AML/CFT Law). Once the case has been forwarded to
the Promoter of Justice, the analytical role of the FIA ends there, although it can still support the
investigation or prosecution with its financial expertise in an advisory capacity.

41 The wording of the old provision was considered too generic.

42 The FIA confirmed to evaluators that they have used their power under the revised AML/CFT Law to request
information from entities other than the one that reported.

71

309. Great attention is given to the autonomy of the FIA in its operational functions as a FIU within
the HS /VCS preventive AML/CFT system. This principle is expressly stated in Art. 2 septies 1 . of
the revised AML/CFT Law and Art.2§2 of the FIA Statute. The operational independence is
emphasised by the circumstance that the FIA is a stand-alone legal personality unrelated to any
Dicastery or Department. Also the financial provision (€900.000 for 2012) and human resources
should be sufficient to avoid the FIA being dependent on outside support to be able to function.
The VCS authorities do not perceive a possible conflict of interest arising from the fact that the
President of the FIA is also a member of the Cardinal Committee overseeing the activities of the
IOR. There are indeed no indications that this dual position affects the FIA operational
independence. On the other hand, the authority to decide on the conclusion of its own MOUs with
its counterparts has been taken away from the FIA, although the whole process is still initiated
and managed by the FIA (Art. 2 septies §1 of the revised AML/CFT Law).

310. Art. 2 septies 5. and 37 of the revised AML/CFT Law mandate a confidentiality and security
regime for all data and documents held by the FIA. Also, Art.7 of the FIA Statute imposes the
"highest secrecy" on the Organs of the FIA and its staff in respect of all matters ("anything")
concerning the Authority and its relation with third parties (§1). The provisions are quite
stringent, but make an exception for exchange of information in the context of international co-
operation or with the judicial authorities. In practice the FIA restricts access to its database to its
own staff. At the moment the reports are kept in a safe, awaiting the creation of a secured IT
system allowing for direct electronic reporting.

311. Dissemination of FIA held information, particularly the STR based reports, is regulated as to
its destination (PoJ and foreign counterparts), whilst protecting the confidentiality and security
(Art. 37. 2 & Art. 41 of the revised AML/CFT Law). The operative relationship and
confidentiality requirements between the FIA, the PoJ and the Gendarmerie can be further
developed through MOUs (Art. 37.3).

312. As well as being called to develop typologies and trends and periodically publicise non-
confidential statistics and activity information (Art. 2 septies 4a & b of the revised AML/CFT
Law), the FIA must forward an annual report of its activities to the Secretary of State by 31
March of each year (Art. 2 septies 8).

313. The FIA is seriously considering joining the Egmont Group and has already taken steps to
initiate the membership procedure.

314. The principles and modalities of mutual co-operation and exchange of information between
the FIA and its counterpart FIUs are laid down in MOUs. In all cases the co-operation is governed
by the principles of information exchange of the Egmont Group (free exchange, prior consent,
confidentiality and reciprocity) 43 .

Recommendation 30 (FIU)

315. The FIA is composed of a Cardinal President, a Board of 4 Directors (chaired by the
President) and the FIA Director and his staff. The Supreme Pontiff appoints the President for a
period of 5 years (extendable) and the Board of Directors. They are responsible for and supervise
the organisation and functioning of the FIA (Art. 4 & 5 FIA Statute).

316. The FIA Director is appointed by the President, subject to the approval of the Secretary of
State, for a three year period (extendable). He is responsible for the operational aspects of the unit
(Art. 6 FIA Statute). His personnel are also hired by the President and numbers 7 in total
(including 3 temporary/contract staff). The IT system is being developed using the software
application of Italian banks (OASI), and is made ready for on-line reporting.

43 The authorities have subsequently reported that they have entered into one MoU with an FIU. In addition they
have approached 1 1 other FIUs receiving formal assent from two.

72

317. The budget is prepared by the Director and approved by the Board of Directors. The budget is
then submitted to the Prefecture for the Economic Affairs of the Holy See, according to Art. 178
of Pastor Bonus. In 2011 the operational budget for the FIA was €600,000. This was augmented
to €900,000 for 2012. All in all, in the present circumstances the financial, technical and human
resources appear adequate. The system is gradually coming out of its development phase and
steadily becoming fully operational. Taking into account the significant workload that comes with
the extra functions assigned to the FIA, it remains to be seen if these resources will prove to be
sufficient for the FIA to perform its task effectively once the preventive system generates more
reports.

318. The members of the Board are required to be of proven reliability, competence and
professional skills (Art. 5 §1 FIA Statutes). At the time of the MONEYVAL on-site visits all
Board members had a highly qualified background and expertise in canonical,
financial/economic, academic and/or judicial/legal matters.

319. The professional requirements for the operational Director of the FIA are high in terms of
qualifications and capability. Art. 6 1. of the Statute requires that the Director is adequately
qualified and is to have proven competence and professional skills in legal-financial matters and
computer science, acquired in the institutional matters of the Authority. The present Director was
previously active for a long time in the higher echelons of the Italian FIU. Equally Art. 6 3. of the
Statute requires that the FIA staff have the necessary professional skills in legal, financial or
technical (IT) matters to ensure an effective functioning of the unit.

320. The FIA personnel has undergone the following AML/CFT training activities in 2011 and
early 2012 (in man/training days):

• conferences and seminars: 6 days 44 .

• International issues: 8 days 45 .

• IT: 20 days 46 .

Recommendation 32 (FIU)

321. The authorities supplied the following statistics on the FIA activities in 201 1 :

• Requests for information to other units during 201 1 : 1.

• Requests for information to subjects (Art. 2 AML/CFT Law) in 201 1 : 7.

• Requests for information from other units in 201 1 : 7.

• Number of cases opened: 12 47 .

"La nuova funzione antiriciclaggio e il responsabile antiriciclaggio", organised by AIRA (Associazione

Italiana Responsabili Antiriciclaggio), 3 May 2011
"Aspetti giuridici del contrasto del riciclaggio finanziario: problematiche applicative e prospettive di riforma

normativa", during this seminar it has been established the Osservatorio Permanente Antiriciclaggio, 14

November 2011, University of Roma tre.

"Antiriciclaggio e Charity Crime nel terzo settore" , organised by the Associazione Ricerca Governance

Impresa Sociale (ARGIS) and Aha Scuola Impresa e Societa (ALTIS), 25 January 2012, at the Universita

Cattolica del Sacro Cuore
MONEYVAL training seminar for mutual evaluation assessors on the revised FATF 40 + 9 Recommendations

and the 2004 AML/CFT Methodology, 25 - 29 July 201 1, Strasbourg, France.

10 lr Experts' MONEYVAL Meeting on Money Laundering and Terrorist Financing Typologies (subjects:
trade based money laundering in cash intensive economies and the postponement of financial transactions
and the monitoring of bank accounts) 3 1 October - 2 November 20 1 1 , Tel Aviv, Israel.

46 2 members of FIA have followed 10 days of specific training (each), organised by the OASI company, at the

Vatican City State.

73

322. It is underlined that of the 12 cases opened in 2011, only one case was triggered by an STR.
Furthermore, the relatively high number of incoming requests from counterpart FIUs (7) is
noteworthy. All in all, the figures indicate a level of operational activity commensurate with the
starting phase of an FIU operating in a jurisdiction with a small financial sector.

Effectiveness and efficiency

323. The FIA clearly holds a key and independent position within the AML/CFT system, as the
legislator intended. The effectiveness of the whole system will very much depend on the level of
efficiency and performance of the FIU as a support and expert information source to the law
enforcement community. With the introduction of the revised AML/CFT Law by Decree CLIX
the FIA is still firmly embedded in the centre of the preventive system and is legally endowed
with a range of powers to perform its duties in an adequate way.

324. Compared to the Law no. CXXVII, however, the position and legal capacities of the FIA have
been weakened:

• the FIA no longer has an advisory function (Art. 34.2 old);

• the power to query additional information no longer includes judicial information (Art.
33.2 old);

• more seriously, the FIA appears to only be able to request additional information from
the entity that has actually reported (Art. 33.3 old - Art. 36 bis l.b new);

•

while not a unique case, the FIA no longer has the authority to conclude autonomously
MOUs with its foreign counterparts (Art. 2 septies 7 & 41 new).

325. With the exception of the new Art. 36 bis l.b, these changes remain within the limits of the
international standards. Nonetheless it appears to the evaluators that these changes could have an
adverse impact in practice in terms of efficiency of the FIA as the centrepiece of the AML/CFT
system. However, as the AML/CFT Law as amended was only adopted on 25 January 2012, it
was not possible for the evaluators to assess the effectiveness of its application.

326. It is understood that the final implementation of the legal framework is still an ongoing
process, but it is important that some uncertainties and deficiencies be cleared away to enhance
the effectiveness of the FIU:

•

47

It is still unclear how far the FIA's authority reaches in querying financial and administrative
data, particularly in relation to the foundations. Logically that would entail direct access to
information held by all Dicasteries, but it is still an open question if that also extends to
foundations located in and/or dependent from the Holy See. As these foundations play a
significant role in the financing of the VCS activities and the social and religious works of
the Holy See, and as such must be above all suspicion, the FIA should, as a matter of
principle and out of effectiveness considerations, have undisputable access to all relevant
information held by these foundations.

• Beside the extent of the authority of the FIU, there is also the question where exactly its
"jurisdiction" starts. The Law refers to "segnalazioni" (i.e. disclosures or SARs) as the
starting point for any FIU operational activity, but in reality the FIA has considered itself
legally competent to deal with foreign requests and other sources of information. Mutual co-
operation with foreign counterparts is indeed provided for in Art. 41 of the AML/CFT Law,
but from a legal point of view this does not explicitly empower the FIA to conduct enquiries
on behalf of a foreign counterpart. As for other triggers of the FIU's analytical function there
is no formal legal basis to be found in the Law. Any legal challenge on this point could be
pre-empted by explicitly putting counterpart requests and other sources (to be specified) on a
same legal footing as a SAR, or by formally introducing the possibility for the FIA to act on

See footnote 20.

74

their own initiative.

• Art. 36 bis Lb unduly restricts the power of the FIA to query additional information from the
reporting entities to the entity that has filed the STR. This is not only contrary to the
standards, it also raises effectiveness concerns.

• The FIA freezing capacity is a powerful and effective tool promoting recovery of criminal
assets; it could, however, profit from some fine-tuning. The text of Art. 2 septies §3 h seems
to limit this power to halting specific suspect operations, nor is it specified within what time-
limit the FIA has to react to an SAR. Efficiency would be increased if the freezing measure
would also apply to accounts generally. Also, the obligation to immediately hand over the
case to the Promoter of Justice excludes the possibility to freeze in order to give the FIA
more time to conduct or deepen its analysis to determine if there are sufficient indications or
not.

2.5.2 Recommendations and comments

Recommendation 26

327. Of the cases treated by the FIA, only one 48 had been initiated by an STR during the relevant
period; the rest were initiated through other sources such as foreign requests. There has been no
dissemination to the Promoter of Justice as yet. Although at this point any assessment of the
effectiveness would be premature, these findings give rise to an assumption that the majority of
the cases will be triggered by external sources and not be generated by the HS/VCS STR system.
It will be important to develop the HS/VCS AML/CFT system to become more self-supporting in
order not to leave the initiative to outside sources and for the FIU not to become over-dependent
on foreign input.

328. In this initial phase the deficiencies and uncertainties in the legal framework, which is
basically sound, should be remedied by:

expressly extending the power of enquiry of the FIA to the information held by all entities
subjected to the reporting duty;

clarifying to what additional sources the FIA has access and to include explicitly the
foundations located in and/or dependent from the HS;

specifying the instances triggering the authority and intervention of the FIA, beside the
receipt of SARs;

reinforce the autonomy of the FIA by restoring its decision power to conclude mutual co-
operation agreements with its counterparts.

as an effectiveness consideration, strengthening the freezing capacity of the FIA to include
accounts and revisit the obligation of immediate handover to the Promoter of Justice.

Recommendation 30

329. In the present circumstances the FIA is sufficiently resourced and staffed with expert and
honourable people with the appropriate level of experience to be able to cope with an increased
inflow of reports and other forms of information.

Recommendation 32

48 See footnote 20.

75

330. The FIA statistics appear to be adequate.

2.5.3 Compliance with Recommendation 26

Rating

Summary of underlying rating

R.26

LC

• Power to query additional information does not appear to extend to all
entities subject to the reporting obligation.

• Effectiveness considerations:

• No access to information held by HS foundations.

• Recent adoption of AML/CFT Law meant that it was not possible
to assess effectiveness of implementation.

2.6 Law enforcement, prosecution and other competent authorities - the

framework for the investigation and prosecution of offences, and for
confiscation and freezing (R.27 and 28)

331. The judiciary power in the HS/VCS is exercised by the Courts, i.e. the Single Judge, the
Tribunal, the Court of Appeal and the Court of Cassation (Law CXIX approving the judiciary
system in the HS/VCS (see Annex XVI)). The law enforcement segment of the HS/VCS
comprises the Public Prosecutor's Office (aptly named the Promoter of Justice), nominated by the
Pope; and the Gendarmerie Corps, whose primary functions as the only police force in the VCS,
are the maintenance of the public order and the investigation of offences. The Swiss Guard has
military status and is not involved in any law enforcement activity.

2.6.1 Description and analysis
Recommendation 27

332. Mainly due to the small size of the law enforcement community, there are no law enforcement
authorities specifically and exclusively specialised in the prosecution and investigation of ML or
TF.

333. Promoter of Justice : according to Art. 15 of the Fundamental Law of the HS/VCS (see Annex
X) the judicial power is exercised in the name of the Supreme Pontiff by the organs within the
judicial structure of the State, in which the Promoter of Justice operates. Among other things he is
responsible for prosecuting offences, which would include ML & TF. He is the authority
responsible for receiving reports from the FIA about probable ML & FT, and he decides on
whether to pursue the case and allocate it to the Gendarmerie for a further investigation, which
would be carried out under his authority. If need be, particularly when special powers are required
to conduct an investigation, a single judge can act as an investigating judge.

334. Until now the Promoter of Justice has not received any reports from the FIA, nor have there
been any ML or FT prosecutions. The Promoter of Justice is, however, aware of the legal issues
which any successful prosecution entails, particularly in respect of the proof of the predicate
offence.

335. According to Art. 16 of the Fundamental Law the Supreme Pontiff can defer the investigation
and the decision in respect of a particular subject (istanza). This power includes pronouncing a
decision according to equity and the exclusion of any further appeal (gravamen). This is

76

considered to be consistent with the powers (legislative, executive and judicial) of the Supreme
Pontiff as sovereign of the VCS. On the other hand Art. 15 of the Fundamental Law establishes
that the judicial power is ordinarily exercised in the name of the Supreme Pontiff by the organs
constituted in accordance to the legal system of the State. The Vatican magistrates (prosecutors)
are therefore invested with this ordinary delegated authority. This means that the judges are
nominated by the Supreme Pontiff but they decide and formulate the sentences independently and
subject only to the observance of Canon Laws and laws issued by the VCS legislator.

336. Gendarmerie : Except for Art. 13.3 Law CCCXXXIV on Government of the HS/VCS, the
rules and provisions governing the organisation, function, and powers of the Gendarmerie are not
found in any HS/VCS Statute, but find their base in internal regulations, such as the Regulations
of the Corps of the Gendarmerie (see Annex XXXIII) the applicable (Italian) Criminal Procedure
Code (arrest, investigative police, searches, sequestration) and specific provisions in diverse laws
or regulations. The Gendarmerie Corps carries out the police tasks, including border, criminal and
fiscal police investigations, maintaining security and public order, and prevention and repression
of offences. They perform the tasks of judiciary police when investigating criminal offences under
the authority of the Promoter of Justice. Although art 2 octies §1 of the revised AML/CFT Law
now specifically entrusts the investigation of money laundering and terrorism financing to the
Gendarmerie, the Corps has no specialised financial department and is likely to rely on the
contribution of the FIA to assist in ML/TF investigations. If necessary, they see no problem in
creating a special section to deal with financial criminal activity. As yet they have not been
involved in any domestic ML/FT investigations.

337. Considering the geographical position of the VCS, interaction with the Italian police is
obviously very frequent and occurs practically on a daily basis, mostly in the form of exchange of
intelligence and public order maintenance support. Art. 2 octies §3 of the revised AML/CFT Law
now provides for the possibility for the Gendarmerie to enter into MOUs with their counterparts,
subject to the nihil obstat of the Secretary of the State. The Gendarmerie is presently considering
the advisability of entering into such an agreement with the Italian police.

338. HS/VCS judicial authorities do have the option to waive their jurisdiction and hand over the
case to the Italian (see Art. 3 & 22 Lateran Treaty) or other foreign authorities, which the
HS/VCS authorities could consider if there is no particular interest for the State (e.g. no HS/VCS
citizen involved). The relation and liaison with the Italian police services is not organised in a
structural way, but happens rather on an ad hoc basis.

339. There are no explicit texts referring to the possibility to defer arrests or seizures for
investigative effectiveness purposes (Licet). On the other hand there are no prohibitive provisions
either (Non Licet). The HS/VCS has not formally considered expressly providing for this
possibility in their legislation. Such an operational decision is indeed within the normal powers
and prerogatives of the Promoter of Justice or the Investigating Judge, under whose responsibility
and authority the investigation is conducted, so no other (legislative or other) measures need to be
considered.

Additional elements

340. The use of other special investigating techniques, such as undercover operations, telephone
tapping and infiltration, is not expressly provided for in the VCS legislation, except for the
possibility of telephone interception (Art. 170 CCP). However, according to the authorities, other
techniques can also be applied when instructed or sanctioned by the investigating magistrate.

Recommendation 28

341. The procedures regulating the law enforcement actions in this field are the norms of the Italian
Criminal Procedure Code of 1913 with subsequent amendments as integrated by Vatican law. The
power to order production of documents, searches or seizure rests with the judicial authorities.

77

The Gendarmerie (with functions of investigative police) has the power to search persons or
premises under the direction and authority of the Promoter of Justice (Public Prosecutor). Art. 233
of the CPC states: "If there are substantial indications that someone is concealing goods subject to
an order of sequestration, or that those goods can be found in a certain place, or that it would be
possible to arrest the accused or a fugitive person for which there is an arrest warrant, the
preliminary investigating judge may order the search of the person or home, and proceed with the
assistance of officers or agents of the investigating police, and, if necessary of security forces. In
urgent cases it is possible to delegate an investigative police officer to proceed, observing the
following rules". According to Art. 234 of the CPC "the search of a house or in closed places
adjacent to it cannot begin before sunrise nor after sunset. Nevertheless, in urgent cases the judge
can issue a decree that permits the search to begin during the night".

342. The term "funds" is defined in Art. 1.11 of the revised AML/CFT Law as "assets of every
kind, whether tangible or intangible, movable or immovable, as well as legal documents or
instruments in any form, including electronic or digital, evidencing title to or interest in such
assets" and serves for the definition of "goods" (the term in Italian is "beni").

343. Consequently, searches have to be authorised by the judicial authorities except in cases of
flagrant crime and in urgent cases when the Gendarmerie can search on their own initiative
without having to request a prior authorisation.

344. Financial information held by financial institutions, including the data collected in the context
of CDD and other information covered by financial secrecy is accessible through the intervention
of judicial authorities (the order of the single judge). According to Art.166 of the CPC "officials
of the investigating police should sequester any goods that were used to commit a crime, those
which were the product of the crime, and all which could be used to ascertain the truth". The only
limitation upon the investigative police seems to be related to sealed documents because, as it is
set out in Art. 170, "during sequestration, officials of the investigative police cannot open letters
under seal, other letters, folders, packages, letters of credit, telegrams, or documents, but must
instead transmit them intact to the judicial authority". That refers only to the period of
sequestration because sealed documents can be opened by the judge.

345. There is no specific mention in the law of the possibility of seizing computerised data. The
only provision the evaluators found in the CPC (dating from 1913) that could indirectly be used to
demonstrate this facility for the police and judiciary authorities was the provision of Art. 166 of
the CPC on seizure of anything "which could be used to ascertain the truth" and of Art. 162 on
obligation of the investigative police "to investigate crimes, collect evidence". On the other hand,
Art.32 of the revised AML/CFT Law states that financial institutions and other obliged entities
are required to preserve "the documents, data and information obtained while fulfilling the
customer due diligence requirements, so as to permit the Judicial Authorities to reconstruct the
relationships, services and transactions even in case of a criminal proceeding. In the original
version of the AML/CFT Law (Art. 40) there was a provision stating that "any news, information
and data possessed, by reasons of their activity, by the subjects referred to in Art. 2, their
managers, employees, consultants and collaborators, bound by whatever relationship, are covered
by secrecy in respect of everyone, except for the Financial Intelligence Authority and the
Judiciary Authority, both inquiring and adjudicatory, if, for the latter, the information requested is
necessary for investigation purposes or proceedings relevant to violations subject to criminal
punishment"; however, the same article in the amended law refers the lifting of secrecy for those
authorities only in relation to the information held by competent authorities. At the same time a
new Art. 37 bis was introduced which states in its paragraph 2 that "financial secrecy shall not
obstruct the activities and the requests for information from the authorities competent for the
prevention and countering of money laundering and the financing of terrorism". And Art. 37.6
mentions now the possibility of sequestering records or documents indirectly providing for a
mandate for the seizing of computerised data.

78

346. Failure to comply with the obligations mentioned in the previous paragraph is subject to
sanctions by the FIA from €10,000 to €250,000 for the natural persons and from €10,000 to
€1,000,000 (Art. 42.1 of the revised AML/CFT Law).

347. The Gendarmerie is able to seize assets. The seizure can be ordered in the course of a judicial
investigation and it remains in force until the end of the criminal proceedings. Art. 612 of the
CPC states that "those goods that are the proceeds of crime or that are somehow related to it, are
held under sequester until the procedure so requires". In cases of necessity and urgency, the
Gendarmerie can seize the corpus delicti and any relevant items. This seizure has to be notified in
writing within 48 hours to the judicial authorities.

Power to take witness statements

348. Statements in connection with any investigation are taken by the judicial authorities.
Statements and testimonies made to the investigating judge may be used both during investigation
and legal proceedings. In flagrant crime cases or urgent cases these and cross-examination of
witnesses can be taken by the investigative police (Art. 169 of the CPC). The use of statements
and testimonies made to the investigative judge is regulated in Art. 245 of the CPC. All the acts of
the preliminary stage may be used for the final sentence. Giving false or hostile evidence before a
Judicial Authority is punished by terms of imprisonment from 1 to 30 months, if done to the
prejudice of an accused person or during a criminal trial, then the punishment is from 1 to 10
years (up to 20 years in a specific case of aggravating consequences) (Art. 214 of the CC).

Recommendation 30 (law enforcement and prosecution)

349. There are 2 Promoters of Justice exercising their function, both in civil and criminal cases,
with the HS/VCS Courts. This is a fully independent function. In the judicial year 2010 they
conducted 200 criminal procedures in total, including 1 mutual legal assistance procedure.
Although quite heavy, the work burden is deemed manageable. As previously noted, they have
not yet been confronted with ML/FT cases.

350. The Gendarmerie forms part of the HS/VCS administration. It counts 137 officers (15
commissars, 68 inspectors, 49 gendarmes apart from the leadership of the Corps). The
Gendarmerie Commander is the Director of the whole Security and Public Order Department
which includes additionally to the mentioned police staff the Fire Command and Technical
Service.

351. The Gendarmerie Corps has a budgeted headcount of 197, which leaves 60 vacancies unfilled.
This is of course a restraint in terms of human resources, but does not appear to hinder the normal
functioning of the service. The Gendarmerie conducts its investigations under the authority of the
Promoter of Justice or the Single (Investigation) Judge, who can issue instructions to the
investigators. The table below demonstrates the number of investigations in the previous years
(none of them were related to ML or TF).

Statistics on criminal investigations
conducted by the Criminal Police Department of the Corps of Gendarmerie

Year

Number of Investigations

2008

38

2009

58

2010

66

2011

92

79

352. In accordance with Art. 7 and 13 of Law No. CXIX Law that approves the Judiciary system of
the State of Vatican City, the Promoters of Justice are appointed by the Pope from the Italian legal
community. The conditions include high standards of irreproachable morality and legal expertise
and experience.

353. The personnel of the Gendarmerie must also comply with moral and professional standards.
The Regulations of the Safety and Civil Protection Department define the procedure for enlisting
and appointment of the police corps. There are specific criteria in addition to the usual
requirements set by the General Regulations for the Personnel of the Vatican City State
Governorate, including specific competition tests.

354. The Promoters of Justice have not been specifically prepared for dealing with ML or TF cases
and basically rely on their extensive legal background and experience.

355. The HS/VCS authorities indicated that the Gendarmerie officers are recruited, selected and
trained on the basis of the relevant criteria and professional standards (including moral and
religious criteria). Besides the general law enforcement training all members of the Gendarmerie
receive, a number of officers have followed specialised courses and training on financial crime
and terrorism with their Italian colleagues of the Carabinieri and other bodies (see the list below).
However, on the basis of information provided, there does not appear to be enough training
provided to the Gendarmerie staff in the financial investigation field. The skill level of the law
enforcement personnel regarding ML and FT issues clearly needs to be enhanced.

Training courses followed by the personnel of the Corps of the Gendarmerie

• Since 2007, every year, three officials of the Corps of the Gendarmerie take professional
courses for officers organised by the Arma dei Carabinieri (of Italy). Each course lasts one
academic year (October to June) and covers various specialised subjects for officials in the
sectors of public safety and general international law enforcement for police.

• Training course for the staff of the Central National Offices of INTERPOL, headquarters in
Lyon France of the General Secretariat of INTERPOL, 11-13 March 2009, attended by one
chief officer and one functionary officer.

• Course organised by The European Police College (CEPOL) on the trafficking of stolen art
works, Rome, 15-18 June 2010, attended by one functionary officer.

• Course organised by CEPOL on the trafficking of stolen art works, Rome, 24-27 May 2011,
attended by one functionary officer.

• Training course of international cooperation with INTERPOL and the Italian Police on "UN
Security Council Sanctions and their Implementation at National and International Level",
Rome, 5-9 March 2012, one officer attended.

• The European Anti-Fraud Office (OLAF) - training course on Euro currency bank notes
organised by the "Italian Office on False Currency", Rome, 24-26 November 2009, attended
by two officers.

• Seminar on the crime of counterfeiting, Ostia (Rome), 16-20 November 2009, attended by
one officer.

Additional elements

80

356. No special training or educational programs are provided for the judicial authorities regarding
ML and FT offences and the seizure, freezing and confiscation 49 .

Effectiveness and efficiency

357. Since Law No. CXXVII came into effect as of 1 April 2011, the judiciary and law
enforcement authorities have not yet been confronted with money laundering or terrorism
financing matters, be it in the form of FIA reports or otherwise, but they feel capable of handling
such cases. The synergies with the FIA are being developed and that should translate itself into
higher performance of the system as a whole. Although the fundamentals are already in place, the
system is still very much under construction, so any attempt to assess the effectiveness of the
implementation by the law enforcement community would be too speculative.

358. There appears to be a risk of underestimating the challenge to law enforcement capacity here.
Specialisation at court and police level may indeed be difficult to achieve in view of the limited
human resources. The Gendarmerie statistics give no indication of any experience in serious
financial crimes (petty theft and attempted illegal entry into Vatican City State seem to be
predominant crimes). The reported financial loss due to crime was €5,200 in 2011, €8,600 in
2010, and €4,900 in 2009. ML/TF cases present particular challenges, especially in terms of the
burden of proof, and require a particular know-how, both by the judiciary and the law
enforcement authorities, which comes from targeted education and case experience. Although the
Gendarmerie has already participated in some training with its Italian and EU counterparts, in the
present circumstances it is doubtful if the Gendarmerie has sufficient resources and expertise to
handle complicated ML/TF cases. Of course, there is always the option for the HS/VCS to waive
its own jurisdiction and hand the case over to their Italian counterparts, but it is imperative that
the HS/VCS law enforcement authorities develop their own efficiency so not to be overly
dependent upon foreign goodwill.

359. The provision on the conclusion of MOUs with "similar" counterparts (Art. 2 octies 3 of the
revised AML/CFT Law) is puzzling, as it does not make any sense in the present law enforcement
environment with its established communication systems and traditions, such as INTERPOL. As
such MOU requires the approval of the Secretary of State, this may be perceived as an undue
restriction of the operational margins of the Gendarmerie. The VCS authorities maintain that the
provision does not introduce an obligation, but is meant to streamline the cooperative interaction
with law enforcement counterparts in AML/CFT matters. In any case, the evaluators consider this
provision redundant and needlessly confusing.

360. The statistics do not indicate any financial investigations having been undertaken, although
some crimes that could have been regarded as predicate offences were registered. There might be
a tendency to transfer the cases to the Italian investigative authorities, rather than taking up the
prosecution in HS/VCS. That is why it is important for the HS/VCS authorities to develop their
own experience and jurisprudence in stand-alone money laundering prosecutions, and take
matters more in their own hands, even where the transfer of prosecution under the Italian
jurisdiction is likely to be an appropriate approach.

361. In view of the above, the evaluators have reservations on the effectiveness and efficiency of
the framework for the investigation and prosecution of ML offences even if the risk of serious ML
crime on the HS/VCS territory or relating to the interests of the Holy See or HS/VCS is
considered low. Simple cases of fraud and other offences are investigated and prosecuted. When
the case does not relate to the HS/VCS the case is passed to the Italian law enforcement
authorities. It is strongly advised that the HS/VCS law enforcement authorities start playing a
more active role in AML/CFT investigations and prosecutions. So far the involvement of the

49 Subsequent to the second MONEYVAL on-site visit, an investigative officer whose official duties include
anti-money laundering of the Gendarmerie attended the "Seminar on Money laundering" organised by the
Italian CEPOL unit, Rome, 17-20 April 2012.

81

Gendarmerie has been limited to looking into several cash declarations following requests from
the FIA. The evaluators feel that the MOU between the law enforcement and the FIA that is being
developed will provide a good basis for a more active role of the Gendarmerie The absence of
practical experience calls into question the capabilities of the Gendarmerie in investigating ML
offences.

2.6.2 Recommendations and comments

362. The law enforcement and judicial authorities' competencies in AML/CFT should be
strengthened, in particular through training with regards to the specifics of the HS/VCS and the
use of existing tools and investigative and computer techniques. The authorities could consider
establishing a joint committee comprising all those concerned in AML/CFT matters to discuss
and evaluate AML/CFT effectiveness and reviewing the system to detect and eliminate
shortcomings, develop and implement policies and legislation, thus improving results.

363. In light of the above it is recommended to:

• intensify the training of the law enforcement authorities, especially in the area of financial
investigation, in view of the expected effects of the recently introduced reporting system.

• as for the judiciary, to participate in such training and develop its own expertise to be able to
deal with the legal challenges inherent in the prosecution of ML/FT.

• further interact and coordinate with the FIA to develop the necessary know-how underpinning
the effectiveness of the system.

364.

The statistics do not indicate that any financial investigations have been undertaken, although
some crimes that could have been regarded as predicate offences were registered. There might be
a tendency to transfer the cases to the Italian investigative authorities, rather than taking up the
prosecution in HS/VCS. That is why it is important for the HS/VCS authorities to develop their
own experience and jurisprudence in stand-alone money laundering prosecutions, and thus take
matters more into their own hands.

2.6.3 Compliance with FATF Recommendations

Rating

Summary of factors underlying rating

R.27

LC

• Effectiveness not demonstrated.

• Lack of experience and training in financial investigations
(effectiveness issue).

R.28

C

2.7

Cross Border Declaration or Disclosure (SR.IX)

2.7.1

Description and analysis

Mechanisms to monitor cross-border physical transportation of currency)

365. With the adoption of the original AML/CFT Law the HS/VCS authorities established a
declaration system for cash and bearer negotiable instruments with legal requirements for all
natural persons. According to Art. 39 of the revised AML/CFT Law all persons entering the
HS/VCS are to declare currency "equal or exceeding the pre-set maximum threshold established

82

by the Pontifical Commission for the Vatican City State, on the basis, inter alia, of the European
norms in force on this matter". The original AML/CFT Law of 30 December, 2010 provided for
the direct application of the threshold established by regulations in force in the (European)
Community. FIA Regulation No. 2 "Concerning the Transportation of Cash and Financial
Instruments Entering or Leaving Vatican City State" (see Annex XVIII) establishes specifically
the threshold above which the currency is to be declared in writing as the amount equivalent to
€10,000. But the amended Act introduced Art. 39 bis that says that "the Pontifical Commission
for the Vatican City State shall pre-set, through a regulation, a maximum threshold for the amount
of currency that may be used, on the basis, inter alia, of the European legislation in force in this
regard". Although Art. 1 of the same Act mentions that "the adoption of this Decree is without
prejudice to the provisions contained in the regulations and instructions adopted by the Financial
Intelligence Authority before 25 January 2012, in so far as they are compatible with it". There
might be a conflict in this regard because the Act instructs specifically the Pontifical Commission
to establish the threshold and not the FIA.

366. It should be noted that Art. 1.10 of the revised AML/CFT Law introduces the definition of
«currency» which meets the requirements set out in SR.IX:

a) currency (banknotes and coins circulating as means of exchange); b) instruments issued or
negotiable to the bearer, including traveller's cheques, cheques, money orders and
promissory notes issued or made out without restrictions to a fictitious payee or otherwise
issued or made out in such a form that the title passes upon delivery; as well as incomplete
instruments, signed but with the payee's name omitted.

367. The AML/CFT Law states that the completed declaration forms have to be recorded and
preserved for five years by the FIA. Art. 2.1. of FIA Regulation No. 2 specifies that the forms are
to be submitted at the offices of the Gendarmerie Corps where they will be accepted after having
identified the declaring person by a valid document. Art. 4 1 . of the Regulation requires that the
originals of the statements be sent within 48 hours to the FIA. At the same time the Regulation
allows for the possibility to file a declaration at the offices of the bodies and organisations
subjected to the requirements pursuant to the AML/CFT Law, operating in the Vatican City State,
"where the said operation takes place". The requirement declare currency also covers transfers of
cash and similar instruments made by post, in which case the statement must be submitted at the
moment of consignment to the offices of the Vatican Post Office, or within 48 hours of receipt at
the offices of the Gendarmerie Corps. The requirement to file a declaration does not apply to
documents of title and negotiable instruments issued with the indication of the beneficiary's name
and corporate name and the clause of non-transferability. The declaration requirement applies to
movement of values by cash transportation vans. This obligation does not, however, extend to
containerised cargo. The obligation to file a declaration applies only to natural persons. Legal
persons are bound by customs duties requirements which cover the need to declare goods for
customs duties. The authorities have provided the following statistics with respect to the total
number of declarations received: for the period from 1 April 2011 till 31 December 201 1 —
declarations at entry - 658, declarations at leaving the state - 1,896. Almost all declarations were
submitted at the IOR (2,551 out of total 2,554), while none were submitted to the Gendarmerie.
The statistics also contain the amounts and types of declared currency.

368. Art. 2 7. of FIA Regulation No. 2 states that the duty of declaration is not considered to be
fulfilled if the information provided is incorrect or incomplete. According to the AML/CFT Law,
the FIA has the power, and obligation to perform inspections for the observance of declaration
duties and to impose administrative pecuniary sanctions in cases of infringement.

369. The agents of the Gendarmerie Corps have the authority to make inquiries and inspections of
the luggage and any other objects carried by the persons entering or leaving the territory of
Vatican City State on a targeted basis in case of justified grounds for suspicion. It should be noted
that according to the Lateran Treaty with Italy of 1929, all goods arriving from abroad and
destined for Vatican City or destined for institutions or offices of the Holy See outside its

83

boundaries, will always be admitted from any point of the Italian border and in any seaport of
Italy for transit through Italian territory, with full exemption from customs fees and duty (Art. 20).
So the customs functions belong solely to the Vatican City authorities. With transportation of cash
the situation is different because the customs controls are additionally performed at the Italian
border control points as the Vatican City State has no entrance points other than from Italian
territory. The Gendarmerie provided statistics for the last years on checks of persons and goods
entering or leaving the state (this seems to refer to normal customs checks and not under the
declaration system).

Year

2009

2010

2011

Persons

600

628

628

Goods

957

968

968

370. No checks resulted in reports.
Requesting Information on Origin and Use of Cash

371. The AML/CFT Law and FIA Regulation No. 2 (see Annex XVIII) specify that the declaring
person has to include into the declaration information on himself, the owner and the recipient of
the values concerned as well as on their origin and itinerary and intended use. The law establishes
in Art. 39.4 that "the Gendarmerie Corps shall make inquiries and inspections to ensure the
compliance of the requirements set forth in paragraph 1, within its own competences and the
limits established by the laws in force". Taking into account that no declarations are submitted to
the Gendarmerie it is doubtful that this provision can be used. At the same time the Regulation
states that in case of suspicion the Gendarmerie Corps officers may inspect the luggage or means
of transportation and order a search of the person, and in case of infringement they shall draw up
an assessment report and inform the FIA within 48 hours. Those actions can be challenged by the
person concerned. Cases of infringement include false or incomplete declaration. The AML/CFT
Law and the Regulation mention suspicion on infringement of the obligation to declare but not
suspicion on money laundering or terrorist financing. The declaration form is very detailed and
contains fields for the origin and intended use of the currency. The evaluation team had been
provided not only with the form template but also with completed declarations.

Restraint of Currency

'ill. Art. 5 of the Regulation allows that, in circumstances where there is an infringement of the
obligation to declare the values exceeding the limit (€10,000), the authorities have the power to
apply an administrative restraint (the Regulation uses the term "administrative attachment").
However, this restraint is limited to the extent of 40% of those values and a minimum amount of
€10,000. The attachment is made for the whole amount if: the object is indivisible; its author is
unknown; or the nature and amount of values or its equivalent in Euro is not immediately
assessable when the attachment is performed. This has not yet been tested in practice.

373. The purpose for such action is only to secure pecuniary administrative sanctions imposed by
the FIA. Moreover Art. 5.6 of the Regulation states that the values shall be restored to the title
holders in any case upon payment of the custody fees, provided that:

a) the party concerned demonstrates the case falls under the provisions of Art. 1.3 of this
Regulation;

b) the party who committed the infringement is deceased;

c) an order of discharge has been issued or the confiscation has not been ordered;

d) the values have not been allocated for the payment of the administrative sanction.

84

Furthermore, Art. 5.8 of the Regulation states that "the Financial Intelligence Authority shall
provide for the restitution of attached values which have not been used for the payment of the
pecuniary administrative sanction imposed, to parties concerned who have claimed it within 5
(five) years from the date of attachment". Art. 5.5 (c) has the only mentioning of "discharge or
confiscation".

374. In any case the law or the Regulation do not explicitly cover the authority by law enforcement
officials to be able to stop or restrain currency or bearer negotiable instruments in order to enable
them to ascertain whether there is a suspicion of ML or TF. The wording of the law implies that
"suspicion" is only non-declaration or incomplete or inaccurate declaration. The law mentions the
right of the customs authorities (i.e. Gendarmerie) to search persons and to submit the report on
the search to the Promoter of Justice, but this refers to cases of smuggling of goods, and belongs
to normal customs duties.

Retention of information of currency and identification data by authorities when appropriate

375. The declaration form contains data to be filled in, which includes, inter alia, the identifying
data of the person submitting the declaration, the owner and the recipient of the values concerned,
the amount as well as information on the origin and destination. All declarations received are sent,
within 48 hours, to the FIA. The information is recorded and kept for a period of 5 years.
Furthermore, Art. 4 of the Regulation states that the Gendarmerie forwards to the FIA assessment
reports on infringements of the declaration regime. Consequently, the information in the
declaration forms shall be retained for use by the appropriate authorities in instances when: (a) a
declaration which exceeds the prescribed threshold is made; and (b) where there is a false
declaration. The legislation is silent on the cases when there is a suspicion of money laundering or
terrorist financing related to transportation of cash.

Access of information to FIU

376. It is to be noted that the declaration form itself is developed by the FIA. As mentioned
previously, all declarations are to be submitted to the FIA. And all assessment reports on
infringements of the declaration obligations are forwarded to the FIA.

Domestic co-operation between Customs, Immigration and related authorities

311. The relevant articles in the AML/CFT Law or FIA Regulations do not mention any additional
provisions relating to domestic co-operation, including regarding cross-border cash movements
apart from the declaration forms' information being forwarded to the FIA by the Gendarmerie and
relevant information on any actions by the Promoter of Justice. The authorities indicated that an
MOU between the FIA and the law enforcement authorities in the AML/CFT field is being
developed. There were no examples of any financial analysis results submitted to the Promoter of
Justice on the basis of declaration system.

International co-operation between competent authorities relating to cross-border physical
transportation of currency

378. The revised AML/CFT Law contains Art. 41 "International Exchange of Information" that
refers only to the powers of the FIA to exchange information. While the article establishes that
"financial secrecy and any eventual restrictions on the communications shall not inhibit the
international exchange of intelligence" it restricts the powers of the FIA to the exchange
information only "with analogous Authorities in other States, on the condition of reciprocity and
on the basis of Memoranda of Understanding". The authorities indicated that the Gendarmerie can
cooperate with the customs authorities of other countries on the basis of general rules. No
examples were given to the evaluators. The Gendarmerie may also exchange information through
INTERPOL channels (there is an officer responsible for that). It was also reported that the
Gendarmerie can exchange information with the Guardia di Finanza of Italy regarding the
import/export of goods as well as on individual cases. It would appear that the possibility to set up
investigation groups and conduct joint search operations seems purely theoretical.

85

Sanctions for making false declarations/disclosures & Sanctions for cross-border physical
transportation of currency for purposes of ML or FT

379. As mentioned earlier, pursuant to Art. 42 of the revised AML/CFT Law the FIA shall impose
administrative pecuniary sanctions in cases of infringement of the declaration of cash obligations
(i.e. when the information is not provided or is incorrect or incomplete). Making a false
declaration or failing to file the declaration or providing inaccurate or incomplete information
constitutes an administrative violation and is punished by an administrative sanction of up to 40%
of the amount concerned, exceeding the equivalent value of €10,000, with the range of sanctions
between the minimum of €10,000 and maximum of €250,000. This provision had not been yet
applied in practice. Art. 6 of FIA Regulation No. 2 allows for a specific procedure of voluntary
settlement, which consists in depositing a sum calculated as follows, and in any case at least €200:
5% if the amount exceeding the limit of €10,000 is not higher than €15,000; and 20% in all other
cases. Voluntary payments are not permitted if the amount exceeding the limit is higher than
€250,000 (or if the person concerned avails himself/herself of said option within 365 days before
the date of notification of the assessment report. In such cases, the FIA orders the return of money
or similar instruments within 10 days following receipt of the proof of payment. The evaluators
have come to the conclusion that the voluntary payment rules enable a person to immediately pay
5% or 20%, of the money exceeding the established threshold, with a minimum of €200, which
might not be an adequate or dissuasive sanction. The authorities have not provided detailed
statistics on the controls carried out by the Gendarmerie or the FIA, the violations ascertained and
the sanctions applied.

380. It seems that these sanctions apply only in case of incomplete or incorrect declarations but not
in case of suspicions of money laundering or terrorist financing.

Confiscation of currency related to ML/FT and pursuant to UNSCRs

381. According to Art. 24 of the AML law "the Financial Intelligence Authority, by its own
provision, without delay and without giving previous notice, orders the freeze of the funds and
other assets owned or possessed, exclusively or jointly, directly or indirectly, by the persons
designated by the Secretariat of State" (on the basis, inter alia, of the relevant United Nations
Security Council resolutions). Because practically all cash declarations (with cross-border
movement) are done at the IOR, the criteria of SR.III seem to be met.

Notification of foreign agency of unusual movement of precious metal and stones

382. The competence for detecting any unusual movement of precious metals and precious stones
belongs to the Gendarmerie Corps in the ordinary exercise of its tasks. Within the Gendarmerie
Corps there is a frontier and customs control unit which is in charge of performing these functions
at frontiers. The Gendarmerie Corps in principle is able to exchange information with foreign law
enforcement agencies and can refer a case to Italian law enforcement authorities although in this
particular case there might be a conflict of jurisdiction because under the Lateran Treaty the
Italian authorities are excluded from any customs functions for the goods to or from the VCS. But
in practice such a possibility has never been used. The Law does not explicitly cover aspects
arising from the discovery of unusual cross-border movement of gold, precious metals and
precious stones (they can be considered to be included in the term "goods"), and those are not
covered as such by any declaration requirements. The authorities indicate that without prejudice
to the provisions concerning cross-border movements of cash, the Gendarmerie, in the framework
of ordinary control customs activities on the import and export of any goods, may detect gold,
precious metals and stones.

Safeguards for proper use of information

383. Art. 37 bis of the revised AML/CFT Law states that "all notices, information and data held by
the subjects referred to in Art. 2, §1, their legal representatives, administrators, directors,
employees, consultants, and collaborators on any grounds, by virtue of the exercise of the
activities referred to in the same Art. 2, §1, shall be protected by financial secrecy. Financial

86

secrecy shall not obstruct the activities and the requests for information from the authorities
competent for the prevention and countering of money laundering and the financing of terrorism".
And for the competent authorities Art. 40 of the same act states that "all information held by the
competent authorities shall be subject to official secrecy, without prejudice to the activities of the
Judicial Authorities in case of criminal proceedings". As the authorities stated that is valid for the
information on cross-border transportation as well.

384. Furthermore, Art 7 of the FIA Statute (see Annex VI) states:

1. The subjects mentioned in the Articles of this Chapter are obliged to keep the highest secrecy
about anything concerning the Authority and its relationships with third parties.

2. The secrecy is not a restriction for the implementation of duties in matters of international co-
operation and towards Judicial Authorities, both inquiring and adjudicatory, when the
information requested is necessary for inquiries or proceedings concerning offences subject to
criminal sanctions.

Training, Data Collection, Enforcement and Targeting Programs

385. The information available, did not demonstrate that the Gendarmerie had received adequate
training in this particular field.

Supra-National Approach: Timely Access to Information

386. Not applicable to the HS/VCS.
Additional elements

387. Reports are maintained in a computerised data base of the FIA and of the Gendarmerie.

Recommendation 30 (Customs authorities)

388. The authorities stated that they have involved staff with experience in inspections on persons
and means of transport in the customs control function. The requirements for the officers are the
same requirements as for all Gendarmerie staff. The information provided to the evaluation team
on training did not contain any training in issues related to detecting illegal cross-border
transportation of currency.

Recommendation 32

389. Statistics maintained by the authorities are adequate.
Effectiveness and efficiency

390. The introduction of the declaration requirements is relatively recent, and the authorities have
already introduced amendments to clarify the requirements. The introduction of such a declaration
system and forwarding of the completed declarations to the FIA and the subsequent storage of the
data contained in the declaration allows the FIA and the other competent authorities to monitor
the flows of cash and other instruments in and out of Vatican City State. The effectiveness of the
implementation of the declaration obligation needs to be further enhanced especially as the
Gendarmerie, with its customs powers, seems to be distanced from that. That might also influence
the ability of the authorities to exchange information on cross-border transportation because of
limitations for the FIA where all the information is kept. Specifically the authorities have to look
at how the provision for voluntary depositing influences the system of sanctioning.

2.7.2 Recommendations and comments

Special Recommendation IX

87

391. Authorities should take stock of the sanctions applied and analyse whether the voluntary
settlement provisions undermine the effectiveness and deterrent scope of the sanctions, and if
appropriate, reconsider the statutory sanctions to ensure that these are proportionate. Authorities
should consider introduction of a clearer indication on powers to act on suspicion of money
laundering or financing of terrorism into the provisions of Art. 39 of the AML/CFT Law.

392. As all declarations have so far been submitted at the IOR, Governorate or APSA, the
authorities should review the existing provisions and find a better way to facilitate involvement of
the Gendarmerie with its law enforcement powers of restraining currency. The existing delay in
the processing of the declarations might influence the effectiveness.

Recommendation 30

393. Comprehensive training should be provided regularly to the Gendarmerie on detection of cash
couriers.

2.7.3 Compliance with Special Recommendation IX

Rating

Summary of factors underlying rating

SR.IX

PC

• The declaration requirement does not cover shipment of currency
through containerised cargo.

• Doubts on the ability of the Gendarmerie to restrain currency where
there is a suspicion of ML/FT as all declarations have been made at
financial institutions.

• Restrictions on the ability of the FIA to exchange information with
counterparts on cross-border transportation.

• The voluntary payment rule substantially reduces the level of
sanctions and may undermine the deterrent scope of the sanctions.

• It was not demonstrated that the relevant authorities were provided
with sufficient training to effectively perform their functions
(Effectiveness issue).

PREVENTIVE MEASURES - FINANCIAL INSTITUTIONS

394. Pursuant to Art. 2 §1 letter a of the revised AML/CFT Law all persons, either natural or legal,
that conduct professionally one of the following activities are bound to observe the measures
regarding CDD, registration, and record-keeping, as well as the reporting of suspicious
transactions.

i. the acceptance of deposits and other repayable funds from the public;

ii. lending;

iii. financial leasing;

iv. transfer of funds;

v. issuing and managing means of payment;

vi. issuing financial guarantees and commitments;

vii. trading in any kind of financial instruments, exchange rate and interest contracts;

viii. participation in issuing securities and the provision of related financial services;

ix. management of individual or collective portfolios;

x. safekeeping and management of currency and other securities;

xi. any other form of investing, administering or managing currency, funds or other assets;

xii. underwriting and placing life insurance and other investments related to insurance;

xiii. currency exchange.

395. Accordingly, the AML/CFT Law applies to all activities and operations carried out by
financial institutions as defined in the Glossary to the FATF Methodology. The table under
Section 1.3 above sets out which of the above-mentioned activities or operations are in practice
undertaken by the IOR and APSA, if conducted as a business for or on behalf of a customer.
Overall the IOR is the most relevant financial institution for the purposes of this evaluation report.

Customer Due Diligence and Record Keeping

3.1 Risk of money laundering / financing of terrorism:

396. The Vatican City State is geographically and demographic ally the smallest country in the
world and consequently there is very little domestically generated crime. However, St Peter's
Basilica and the Vatican Museums receive more than 18 million pilgrims and tourists each year
and this inevitably results in a certain level of petty crime. No independent businesses are
established within the HS/VCS, as a public monopoly regime exists in the economic, financial
and professional sectors. Thus, unlike other states evaluated by MONEYVAL, there is no market
economy. Given this the authorities consider that the threat of money laundering and terrorist
financing is very low. However, no formal risk assessment has been done as yet.

397. The AML/CFT Law as amended by Decree No. CLIX of 25 January 2012 applies to all
activities and operations carried out by financial institutions and DNFBP as defined in the
Glossary to the FATF Methodology. The revised AML/CFT Law includes a risk-based approach
to CDD. Enhanced CDD is required by law for non-face to face relationships (see
Recommendation 8 below), correspondent current accounts (see Recommendation 7 below) and
relationships established with politically exposed persons (see Recommendation 6 below). The
only additional requirement for enhanced due diligence that appears to be designed based on a
local risk assessment is the one set out in the FIA Instruction No. 2 and relates to repeated
transactions of deposit of cash or valuables. However, as a result of an incomplete risk
categorisation, enhanced due diligence measures appear to be applied to a very limited number of
customers.

89

398. The instances for simplified CDD as provided for in the AML/CFT Law are designed largely
on the basis of the risk-sensitive elements set out in the Third EU AML Directive and are not the
result of a specific assessment of the risks and vulnerabilities faced by the HS/VCS. The failure to
have undertaken any formal risk assessment implies that there is no basis for determining whether
other potential risks are addressed appropriately. The evaluators have identified other factors
which could increase the risk situation; these include: high volumes of cash transactions and wire
transfers (although, the evaluators fully appreciate that cash transactions are an important
contributor to the funding of the global mission of the church); global spread of financial
activities (including with countries that insufficiently apply the FATF Recommendations); and the
limited availability of information on the non-profit organisations operating in the HS/VCS. The
evaluators' assessment largely matches with a preliminary threat assessment of the FIA. This
preliminary assessment needs completing and formalising.

399. In applying the risk-based approach to simplified due diligence the AML/CFT Law creates
blanket exemptions from the CDD requirements. As such these are not reduced or simplified
CDD measures as suggested by the essential criteria, but an exemption from any CDD except in
those situations when ML or FT are suspected, or when there are reasons to believe that the
previous verification is unreliable or insufficient to provide the necessary information. Obliged
subjects are exempted from observing CDD requirements with respect to life insurance policies,
complementary pension schemes, obligatory and complementary pensions and similar schemes,
beneficial owners of pooled accounts and electronic money which meet certain conditions.

400. In addition, the FIA may authorise the obliged subjects not to apply CDD requirements
regarding particular categories of counterparts and typologies of relationships, services and
transactions of low risk of money laundering or financing of terrorism (see under essential criteria
5.8 below for details). The products and services mentioned above are again taken from the Third
EU AML Directive. The authorities have not set out the basis upon which they have taken the
decision to allow for simplified due diligence in those cases. It should be highlighted that most of
the above-mentioned products and services are not provided by subjects within the HS/VCS and
are therefore not relevant for the local financial environment.

401. There is a clear need for a comprehensive risk assessment to properly judge the adequacy of
the current risk based approach. The Secretariat of State has confirmed that, as a consequence of
the evaluation process, it has become aware of the importance of conducting a detailed risk
assessment in order to develop a comprehensive AML/CFT regime. As a consequence of this the
evaluators were informed that the process for conducting a risk assessment has been initiated.
This process will involve actively seeking recommendations from the FIA and more generally
gathering information necessary for the completion of the risk assessment including the
recommendations of the evaluators on this issue. Furthermore, the Secretariat of State has taken
into account an initial view from the FIA, indicating those areas of inquiry which typically present
possible areas of weakness in many jurisdictions, including: use of cash transactions; the
adequacy and availability of information from non-profit organisations; receipt of donations; and
placing of external contracts.

3.2 Customer due diligence, including enhanced or reduced measures (R.5 to R.8)

3.2.1 Description and analysis

Recommendation 5

Anonymous accounts and accounts in fictitious names

402. In order to protect and promote the integrity and transparency of the economic, financial and
professional sectors, Art. 1 bis a) of the revised AML/CFT Law prohibits the opening or holding

90

of anonymous or ciphered accounts, deposit, savings accounts or similar relationships, or
accounts under fantasy or fictitious names.

403. Representatives of the IOR and APS A assured the evaluation team that all accounts are
opened and kept in the official name of the respective customer, taking into account the
differences between natural and legal entities. The IOR employee responsible for account opening
procedures confirmed that all customer CDD details are accessible to those involved in AML-
relevant operations (including, in particular, front office staff and compliance officers) In
addition, IOR representatives emphasise that the core banking solution used by the IOR since
1996 does not technically allow the use of anonymous or ciphered accounts.

404. IOR and APSA representatives stated that they have no evidence of the use of anonymous,
accounts in fictitious names or numbered accounts in the time prior to the coming into force of the
AML/CFT Law (see also c. 5.18).

405. Safe custody services are provided to very few clients (less than 100) of particular categories
of customers. While not set out in written form, in practice the express approval of the General
Manager is requested before providing such services. The IOR representatives assured the
evaluation team that all of the customers requiring safe custody services have been subject to the
standard CDD procedures in accordance with the AML/CFT Law and that these relationships are
not kept in an anonymous way or under fictitious names.

Customer due diligence

When CDD is required

406. Following the amendments and additions to the revised AML/CFT Law promulgated by
Decree No. CLIX of 25 January 2012, financial institutions are required, pursuant to Art. 28 of
the revised AML/CFT Law, to apply CDD measures:

a) when they establish a relationship;

b) when they carry out occasional transactions equal to or in excess of €15,000, regardless of
whether it is conducted in a single transaction or in various transactions connected one to
the other;

c) when they transfer funds for an amount equivalent to or in excess of €1,000;

d) when there exists a suspicion of money laundering or financing of terrorism, regardless of
any derogations, exemptions, or applicable thresholds;

e) when there are doubts about the veracity or adequacy of the data previously obtained for
identification of the counterpart.

407. Prior to the amendments and additions to the revised AML/CFT Law promulgated by Decree
No. CLIX of 25 January 2012, there was no requirement in Law or Regulation to undertake CDD
measures when carrying out occasional transactions that are wire transfers in the circumstances
covered by the Interpretative Note to SR VII.

408. Pursuant to the definition provided in Art. 1 §28 of the revised AML/CFT Law only
transactions executed within a period of seven days have to be considered as "linked
transactions". This is not in line with the Standard, which does not provide for such a limitation of
the time elapsed between transactions. Given that this time period is published in the Law and
therefore publicly known, it would be possible for criminals to circumvent identification
requirements by taking into account the threshold of €15,000 and the given time period when
requesting financial transactions.

Identification measures and verification sources

409. According to Art. 29 §3 of the revised AML/CFT Law, the obliged subjects are required to
"identify the counterpart, be it a natural or legal person, and they shall verify the identity based
upon, inter alia, documents, data, and information obtained from an independent and reliable

91

source." The obliged subjects have to request from the counterpart those documents, data and
information necessary to fulfil the CDD requirements. Such information is required to include the
purpose of the relationship.

410. Examples of reliable and independent source documents are provided in Part 2 Section IV of
FIA Instruction No. 2 50 . Accordingly the data furnished concerning the client, executor 51 and
beneficial owner shall be verified by examining the following documentation:

a) valid identity documents;

b) public deeds, certified private documents 52 , qualified certificates used to produce a digital
signature;

c) declarations of the diplomatic mission of the Holy See;

d) records and lists of authorised subjects, articles of incorporation, statutes, balance sheets;

e) websites of public organisations and authorities, also of foreign States, provided that the latter
have an equivalent regime. (Note: according to authorities the term " equivalent regime" refers
to an equivalent AML/CFT regime).

411. The attachment to the IOR "CDD Procedures" specifies in detail the documentation standard
for each client category (see excerpt in the section regarding effectiveness and efficiency below).
For example, for all natural persons (e.g. Cardinals, Bishops, Nuncio, Secular Clergy/ Religious
Men, Nuns, Holy See employees, Ambassadors to the Holy See etc.) the verification of the client
identity has to be carried out through passport, identity card, diplomatic identity card or driving
licence.

412. With regard to legal persons (e.g. secular and religious congregations, canonical foundations,
Beatification Causes, Monasteries, Convents, Abbeys, etc.) the documentation standards set by
the IOR "CDD Procedures" vary slightly between the different customer categories. It typically
consists of the Statute (or Foundation-Boards), the Superior and Legal Representative
appointments decree and proof of any legal recognition in Italy 53 . The natural person ultimately
controlling or owning the legal person have to be identified on the basis of identity card,
diplomatic identity card, driving licence or passport. In the case of Apostolic Delegations and
Nunciatures or Vatican Congregations the verification of the client identity can also be carried out
by checking the Pontifical Yearbook (Annuario Pontificio) 54 .

413. Additionally, according to the IOR procedures, the Italian Fiscal code has to be acquired for
both, natural and legal persons residing in Italy. This is due to a requirement by the competent
Italian authority when executing transactions in the Italian monetary area.

Identification of legal persons or other arrangements

50 The FIA Instructions are considered to be other enforceable means as set out under SR.VII in Section 3.5
below.

51 According to the authorities this includes the authorised signatory on the account as well as the person who
actually performs the financial operation.

52

According to the authorities this term refers to documents certified by a public notary.

53

The legal recognition is considered as an alternative or supplementary verification source. The canonical
recognition remains a mandatory verification source. The procedures have been recently modified in order to
also take into account legal recognition in countries other than Italy.

54 The Pontifical Yearbook is the official annual directory of the Holy See. It lists all the popes to date and all
officials of the Holy See's departments. It also gives complete lists, with contact information, of the Cardinals
and Catholic bishops throughout the world, the dioceses, the departments of the Roman Curia, the Holy See's
diplomatic missions abroad, the embassies accredited to the Holy See, the headquarters of religious institutes,
certain academic institutions, and other similar information. Regular updates are issued throughout the year.

92

414. Prior to the amendments and additions to the revised AML/CFT Law promulgated by Decree
No. CLIX of 25 January 2012 there was no requirement in Law or Regulation to verify that any
person purporting to act on behalf of the customer was so authorised, and to identify and verify
the identity of that person. Neither was there a requirement in Law or Regulation to verify the
legal status of the legal person or legal arrangement, as required by the Standard.

415. However, Art. 29 ter of the revised AML/CFT Law requires obliged subjects to ascertain
whether those who intend to represent or to act in the name and on behalf of the legal person are
duly authorised. Obliged subjects are required to identify them and verify their identity on the
basis, inter alia, of documents, data, and information obtained from an independent and reliable
source.

416. In addition, Art. 29 §3 of the revised AML/CFT Law requires that the due diligence shall
include establishing the legal status, legal denomination and registered office, as well as the
identity of those persons who perform the functions of legal representatives, administrators or
directors.

Identification of Beneficial Owners

All . Prior to the amendments and additions to the revised AML/CFT Law promulgated by Decree
No. CLIX of 25 January 2012 there was (due to the wording of the Law) no clear requirement to
take reasonable measures to verify the identity of the beneficial owner using relevant information
or data obtained from a reliable source such that the financial institution is satisfied that it knows
who the beneficial owner is 55 .

418. Pursuant to Art. 29 bis of the revised AML/CFT Law the obliged subjects are required to
determine and identify the beneficial owner and verify their identity on the basis, inter alia, of
documents, data, and information obtained from a reliable and independent source.

419. The beneficial owner is defined in Art. 1 §15 of the revised AML/CFT Law as the natural
person or persons on whose behalf a service or a transaction is conducted or, in the case of a
corporation or legal person, the natural person or persons who are the ultimate owners or exercise
ultimate control of such corporations or legal persons, or who are its beneficiaries according to the
criteria set out in the Annex to the revised AML/CFT law (see further below for further details).

420. Given that the definition of "beneficial owner" includes persons on whose behalf a service is
conducted, the evaluators take the view that the requirement for financial institutions according to
essential criterion 5.5.1, to determine whether a person is acting on behalf of another person, is
met by Art. 29 bis AML/CFT Law. This is complemented by FIA Instruction No. 2, Part 2,
Section III setting out that "at the moment of the identification, the client must state whether the
relationship is being entered into on behalf of another party."

421. In the case of corporations or legal persons, in order to identify the beneficial owner, the
obliged subjects are also required to ascertain the ownership and control of such corporations or
legal persons. Such a requirement was not set out prior to the amendments and additions to the
revised AML/CFT Law promulgated by Decree No. CLIX of 25 January 2012.

422. Furthermore, the revised AML/CFT Law requires obliged subjects to identify and verify the
natural person or persons who are the ultimate owners or exercise ultimate control of such legal
person, or who are its beneficiaries according to the criteria set out in the Annex to the law. The
criteria are largely modelled on the EU 3rd AML Directive.

423. Pursuant to Art. 1 §2 of the Annex to the revised AML/CFT Law the beneficial owner of
corporations is defined as follows:

a) the natural person or persons who ultimately owns or controls a corporation through direct or
indirect possession or control of shares in the joint stock, or of voting rights in such
corporation, through bearer shares;

55 See former Art. 29 § 1 letter b of the AML/CFT Law.

93

b) the natural person or persons who otherwise exercise control over the management of a
corporation.

424. Pursuant to Art. 1 §3 of the Annex to the revised AML/CFT Law the beneficial owner of other
legal persons 56 that manage or distribute funds is defined as follows:

a) if the beneficiaries have already been determined, the natural person or persons who are the
beneficiaries of the patrimony of the legal person;

b) if the beneficiaries have not yet been determined, the natural person or persons on whose
primary interest the legal person was created;

c) the natural person or persons who exercise control over the patrimony of the legal person.

425. In the attachment to the IOR "CDD Procedures" the IOR has specified who the IOR considers
to be the beneficial owner with respect to their different categories of eligible customers (legal
persons) as follows:

Subject typologies

Beneficial owner

Canonical Foundations

President, General Manager, Treasurer, Government
members if required by the Statute

Causes of Beatification

Postulatore

Male and female religious and secular
orders

Religious orders: Supreme Moderator or Superior

who governs the institute, the province or the single

House to which the relation refers (e.g. prior, father

guardian, mother superior) and its bursar.

Secular orders: Grand Master and bursar or Head of

single House and its bursar to which the relation

refers.

Monasteries - convents and Abbeys

The Superior who governs the institute, the province
or the single House to which the relation refers (e.g.
prior, father guardian, mother superior) and its bursar.

Bishops Conference, Dioceses and
representative offices

Bishops Conference: president, bursar, Economic
Affairs Council.

Dioceses: bishop; vicar general; episcopal vicars, if
any; bursar.

Parishes, churches and relevant offices

Parish priest

Seminaries, colleges, various entities

Rector, bursar/treasurer

426. This attachment to the IOR "CDD Procedures" indicates, that the identification of the
beneficial owner applied by the IOR is limited to the natural person or persons who exercise
control over the patrimony of the legal person, but does not include the identification of
beneficiaries or persons in whose primary interest the legal person was created. IOR
representatives stress however, that the beneficiaries are, as a rule, mentioned in the statutes of the
different entities mentioned above, which are normally part of the CDD documentation.

Information on purpose and nature of business relationship

427 '. Pursuant to Art. 29 §3 of the revised AML/CFT Law, the obliged subjects also have to request
from the counterpart information regarding the purpose of the relationship.

428. In addition, pursuant to FIA Instruction No. 2, the obliged subjects are required to acquire
information about the motivations and goals of the customer for establishing a relationship or
accomplishing an operation; the relationship between the client and the executor, as well as

" The term legal person refers to any legal person, regardless of its nature and activity, including foundation and
trusts , that do not fall within the definition of the Public Authority (Art. 1 §3 AML/CFT Law).

94

between the latter and the beneficial owner of the relationship or the operation; the working and
economic activities performed; and finally the customer's business relationships in general.

Ongoing due diligence on business relationship

429. Prior to the amendments and additions to the AML/CFT Law promulgated by Decree No.
CLIX of 25 January 2012 there was no clear requirement that the "ongoing supervision" should
include scrutiny of transactions undertaken.

430. Pursuant to Art. 28 §3 of the revised AML/CFT Law the CDD requirements continue
throughout the relationship, and include the monitoring of the transactions conducted during the
same relationship in order to verify, inter alia, that the transactions are consistent with the
typology and risk level of the counterpart and the counterpart's activities. There is no express
requirement to verify that the transactions are consistent with the institution's knowledge of the
source of funds, if necessary.

431. Pursuant to Art. 33 §6 of the revised AML/CFT Law, the obliged subjects are required to
adopt record-keeping mechanisms that ensure that the customer data and information remains
updated and information gathered while observing the customer identification and verification
requirements, regarding particularly those categories of counterparts and those typologies of
relationships, services and transactions that involve high level risks.

Risk - enhanced due diligence for higher risk customers

432. Pursuant to Art.31 §1 of the revised AML/CFT Law obliged subjects are required to reinforce
the customer due diligence requirements in those situations which, by their own nature, involve a
greater risk of money laundering or financing of terrorism, including:

• non-face to face relationships (see Recommendation 8 below);

• correspondent current accounts (see Recommendation 7 below); and

• relationships established with politically exposed persons (see Recommendation 6 below).

433. The additional measures to be taken to compensate for the increased risk in the latter three
instances (non-face to face, correspondent current account and PEP) are expressly specified in the
revised AML/CFT Law (see Recommendations 6, 7, and 8 below). In addition, there is the above-
mentioned general requirement of Art. 31 § 1 of the revised AML/CFT Law to apply additional
measures to situations which involve a higher risk of ML or TF. In this case however, the type of
additional measures that the obliged subjects should take has not been defined in the law or in
guidance. It is therefore left to the discretion of the obliged subjects to decide what type of
additional measures they deem reasonable and sufficient to mitigate the higher risk. Furthermore,
Part 4 Section I of FIA Instruction No. 2 defines three further situations, where enhanced due
diligence has to be applied on a mandatory basis 57 . These situations are described under essential
criterion 5.12.

Risk - application of simplified/reduced CDD measures when appropriate

434. Pursuant to Art. 30 §1 of the revised AML/CFT Law the obliged subjects are exempted from
observing the CDD requirements if the counterpart is a credit or financial institution located in a
State that observes requirements equivalent to those set out in the revised AML/CFT Law (such
equivalence implies that those institutions are also supervised for compliance with those
requirements). The States that observe equivalent requirements shall be identified by the
Secretariat of State through its own decision.

435. Prior to the amendments and additions to the AML/CFT Law promulgated by Decree No.
CLIX of 25 January 2012 this task was assigned to the FIA. Accordingly, at the time of the

57 FIA Instructions are considered to be other enforceable means. For a full analysis see Section 3.5 under
SR.VII.

95

MONEYVAL on-site visits the equivalent countries were listed in FIA Instruction No. 3 58 . The
list corresponds to the list agreed by EU Common Understanding between Member States on third
country equivalence under the Anti-Money Laundering Directive (Directive 2005/60/EC). In FIA
Instruction No. 3 it is mentioned that the list was drawn up on the basis of the information
available at the international level, and of information taken from assessment reports of national
systems for preventing and countering money laundering and financing of terrorism, adopted by
the FATF, any FSRB, the IMF or the World Bank, as well as other updated information provided
by the States concerned. The Secretariat of State has not issued a corresponding list so far.

436. In addition, the obliged subjects are exempted from observing the customer due diligence
requirements if the counterpart is a domestic Public Authority 59 (Art. 30 §3 of the revised
AML/CFT Law).

437. Furthermore, pursuant to Art. 30 §6 of the revised AML/CFT Law, the obliged subjects are
exempted from observing the CDD requirements in relation to:

a) life insurance policies where the annual premium is not in excess of €1,000 or a single
premium of no more than €2,500;

b) complementary pension schemes, provided that there is no surrender clause and that they
cannot be used as collateral for a loan;

c) obligatory and complementary pensions and similar schemes that provide retirement benefits,
when the contributions are made through deductions from the wages and whose rules do not
permit the beneficiaries to transfer their own rights until after the death of the title holder;

d) beneficial owners of pooled accounts managed by foreign notaries or professionals that
conduct similar activities in another State, provided that they are subject to requirements
regarding the prevention and countering of ML and FT equivalent to those set forth in the
revised AML/CFT Law;

e) electronic money, if no more than €150 can memorised in the device, if it is not rechargeable;
or, if it is rechargeable, if no more than €2,500 can be deducted in a legal year, unless €1,000
or more is reimbursed to the account holder in the same legal year.

438. The above-mentioned instances are taken from Art. 11 of the Directive. Art. 3 of Commission
Directive 2006/70/EC 60 provides criteria which the above-mentioned customers and products
must meet so that they can be considered as customers or products representing a low risk of
money laundering or terrorist financing. This concept has not been adopted in the AML/CFT
Law. The AML/CFT Law allows for simplified due diligence irrespective of whether those
criteria are met or not.

58 At the time of the first MONEYVAL on-site visit the list included the following states and territories:
Member states of the European Community and the European economic area (Iceland, Liechtenstein and
Norway), Australia, Brazil, Canada, Japan, Hong Kong, India, Republic of Korea, Mexico, Russian Federation,
Singapore, United States of America, Republic of South Africa, Switzerland, Mayotte, New Caledonia, French
Polynesia, Saint-Pierre and Miquelon, Wallis and Futuna, Aruba, Curacao, Sint Maarten, Bonaire, Sint Eustatius
and Saba.

59 A Public Authority is defined as an organism or entity that, on the basis of the domestic legal system,
performs, directly or indirectly, an institutional activity inherent to the sovereign authority (Art. 1 §2 AML/CFT
Law). According to the authorities this would include in particular the Vatican Congregations, Apostolic
Delegations and Nunciatures, the Apostolic Camera, APSA and Prefecture of the Economic Affairs,
Governorate of the VCS, but does not include Bishop's Conferences, Dioceses, Parishes, Churches or canonical
foundations. Notwithstanding the legal provision of Art. 3 §1 of the Annex of the revised AML/CFT Law the
IOR maintains that CDD is also conducted on all public authorities.

60 Commission Directive 2006/70/EC of 1 August 2006 laying down implementing measures for Directive
2005/60/EC of the European Parliament and of the Council as regards the definition of politically exposed
person and the technical criteria for simplified customer due diligence procedures and for exemption on grounds
of a financial activity conducted on an occasional or very limited basis.

96

439. Departing from the concept of the Directive, the AML/CFT Law implemented Art. 3 of the
Commission Directive in order to provide for additional instances of simplified due diligence to
those mentioned in Art. 11 of the Directive. The FIA may authorise the obliged subjects not to
apply CDD requirements regarding particular categories of counterparts and typologies of
relationships, services and transactions of low risk of money laundering or financing of terrorism
(Art. 30 §7 of the revised AML/CFT Law). Such authorisation has to be granted pursuant to
criteria set out to in the Annex to the revised AML/CFT Law, which are largely taken from Art. 3
of the European Commission Directive 2006/7 0/EC.

440. Based on Art. 3 §1 of the Annex to the revised AML/CFT Law, the FIA may authorise
obliged subjects not to apply CDD requirements with respect to:

a) public institutions and corporations as well as concessionaries of public activities that fulfil
specific requirements (in particular: where identity is publicly verifiable and certain; where
activity and accounting procedures are transparent; where they are subject to the monitoring
and control of a Public Authority established by the domestic law) 61 ;

b) corporations or legal persons that conduct financial activities outside the scope of Art. 2 § 1
AML/CFT Law but which have been subjected to this law and which fulfil the
abovementioned criteria required for public institutions. (This provision has no scope of
application given that no such corporations or legal persons have been subjected to the
AML/CFT Law);

c) companies listed on a regulated stock exchange 62 ;

d) transactions and related products that fulfil specific requirements (in particular: a transaction
or product which has a written contractual basis; where the transaction is conducted through
an account of the counterpart at a credit or financial institution based in a State that imposes
equivalent CDD requirements; where the transaction or product is not anonymous and its
nature permits fulfilling the CDD requirements; where the product has a pre-set maximum
value; etc.).

441. While assessing whether the above-mentioned instances present a low risk of ML or FT, the
FIA is required to consider carefully whether the counterpart, transaction or product is particularly
susceptible, due to its nature, to be used for ML or FT. They shall not be presumed to present a
low risk of money laundering or of financing of terrorism if there is no data or information that
furnishes sufficient certainty of the low risk. The FIA has not authorised any exemptions to apply
CDD based on Art. 3 §1 of the Annex to the revised AML/CFT Law.

442. The list of exemptions mentioned under Art. 30 §6 of the revised AML/CFT Law has been
taken directly from the Third EC Money Laundering Directive. The HS/VCS authorities have not
undertaken any formal risk analysis to determine whether for these exemptions the circumstances
are appropriate to the local environment and peculiarities.

443. Furthermore, rather than providing for simplified due diligence measures, Art. 30 of Act.
CXXVII creates blanket exemptions from the CDD requirements. These customers and products
are exempt from the CDD provisions that address the key CDD components of identifying and
verifying the customer's identity, identifying the beneficial owner and verifying its identity,
determining the purpose and intended nature of the business relationship, and conducting ongoing
monitoring of the relationship. Therefore, these are not reduced or simplified CDD measures as
suggested by the essential criteria, but an exemption from any CDD except in those situations

61 According to HS/VCS authorities this would include inter alia, the Vatican Press, the Vatican Publishing
House, the Vatican Radio, the Vatican Television Centre. These institutes, according to their own regulations,
come within the competence of the Secretariat of State or of other agencies of the Roman Curia (see Art. 191
Pastor Bonus).

62 There is no express requirement that the listed company has to be subject to regulatory disclosure
requirements.

97

when ML or FT are suspected, or when there are reasons to believe that the previous verification
is unreliable or insufficient to provide the necessary information. (Art. 30 §5 of the revised
AML/CFT Law).

444. For both, credit/financial institutions and public authorities the obliged subjects are required to
gather enough information to determine that the counterpart falls within one of these categories
(Art. 30 §4 of the revised AML/CFT Law). However, there is no further clarification on what
"enough data" means and the provision's scope seems limited to the process of determining
whether the customer qualifies for the exemption. Furthermore, there is no requirement to gather
sufficient information for the exemptions according to Art. 30 §6 and 7 of the revised AML/CFT
Law.

445. Further exemptions from CDD obligations are provided by Art. 31 §3 of the revised
AML/CFT Law. Accordingly, the CDD requirements shall be deemed to be fulfilled, even in the
case of non-face to face transactions, in the following cases:

a) when the due identification has been previously made regarding an already existing
relationship, insofar as the information is updated;

b) for the transactions made at electronic points of sale or ATM machines, through the post, or
through subjects that transfer funds through banking cards. Such transactions shall be ascribed
to the person behind the relevant relationship;

c) when the counterpart's identifying data and other necessary information are found in a public
document, in an authenticated private deed, or in any other legal instruments that provide legal
certainty;

d) when the counterpart's identifying data and other necessary information are found in a
declaration of a Pontifical Representation of the Holy See.

446. The rationale of Art. 31 §3 of the revised AML/CFT Law remains unclear and the wording
appears to be unfortunate. It is in line with the Standard to use public documents, authenticated
private deeds, legal instruments that provide legal certainty or the declaration of a Pontifical
Representation of the Holy See to identify and verify the customer and beneficial owner.
However, the simple fact that such information is available should not lead to the conclusion that
the CDD obligations may be deemed to be fulfilled.

447. According to Art. 28 §3 of the revised AML/CFT Law the duties related to the CDD
requirements ("gli obblighi di adeguata verified') include the monitoring of the transactions
conducted during the same relationship. Due to Art. 31 §3 revised AML/CFT Law, obliged
subjects would be exempted from the obligation of ongoing monitoring for the situations outlined
in the paragraph above, even in the case of non-face to face transactions.

Risk - simplification/ reduction of CDD measures relating to overseas residents

448. Where obliged subjects are permitted to apply simplified CDD measures to customers resident
in another country (see c.5.9), this is not always limited to countries that impose equivalent
requirements to those of the HS/VCS. As described above, FIA may authorise obliged subjects
not to apply CDD requirements with respect to listed companies, irrespective of whether the
company is located in a country that the HS/VCS is satisfied to be in compliance with and to have
effectively implemented the FATF Recommendations.

Risk — simplified/reduced CDD measures not to apply when suspicions of ML/FT or other risk
scenarios exist

449. Pursuant to Art. 30 §5 of the revised AML/CFT Law the simplified CDD requirements are not
to be used when money laundering or the financing of terrorism are suspected, or when there are
reasons to believe that the previous verification is unreliable or insufficient to provide the
necessary information. However, this provision falls short of meeting criterion 5.11, whereupon
simplified CDD measures shall not be acceptable whenever higher risk scenarios apply.

Risk Based application ofCDD to be consistent with guidelines

450. The FIA issued Instruction No. 2 (see Annex XVIII) in matters of assessment of risk factors
and CDD on 14th of November 2011 (shortly before the first MONEYVAL on-site visit).
Pursuant to Part I Section I of Instruction No. 2, obliged subjects may modify the intensity and
extent of CDD duties according to the degree of risk of ML and FT. The Instruction lists risk
factors that have to be taken into account for this modification. Examples provided in the
Instruction are the types of activity performed; operative volumes; nature and characteristics of
the client; activity performed; client behaviour; geographic risk; amount and frequency of
operations and duration of business relationship; geographic destination or origin of assets; and
cash transactions without apparent reasons to justify them.

451. According to FIA Instruction No. 2 the obliged subjects have to define a risk profile to be
attributed to each client entity on the basis of information collected and analysis carried out, using
both the above-mentioned criteria and any other criteria deemed appropriate (Part I Section II).
Subsequently each client has to be attributed a risk class defined in advance by the subjects. The
Instruction also mentions occasions where the assessment of this attribution shall be repeated at a
minimum.

452. Pursuant to the Instruction No. 2 each risk class has to be attributed with a coherent level of
depth and extent of performance of the duties laid down in the AML/CFT regulations (customer
due diligence and assessment of suspect operations). Obliged subjects are required to define the
modes and frequency of assessment in order to keep information and data updated on the basis of
the risk profile.

453. In addition to the mandatory instances for enhanced due diligence laid out in Art. 31 of the
revised AML/CFT Law, Part 4 Section I of FIA Instruction No. 2 also requires that obliged
subjects apply enhanced due diligence in the following situations:

a) repeated transactions of deposit of cash or valuables;

b) when an assessment process has been started in view of reporting a suspect operation to the
FIA; and

c) in relation to products, operations and technologies that could increase the risk of money
laundering or financing of terrorism.

Instruction No. 2 does not provide examples for such products, operations or technologies.

454. While FIA Instruction No. 2 mainly repeats the obligations already set out in the Law and
does not provide examples of a risk-based application of those obligations for different risk
categories, no consistency gaps could be identified between the risk-based approach permissible
according to the AML/CFT Law and the FIA Instruction No. 2.

Timing of verification of identity - general rule

455. Pursuant to Art. 29, §1 of the revised AML/CFT Law, the obliged subjects are required to
fulfil the CDD requirements before entering into a relationship, providing a service or conducting
a transaction.

Timing of verification of identity - treatment of exceptional circumstances

456. While the AML/CFT Law does not provide for exceptions to the above-mentioned obligation
to perform CDD measures before entering into a relationship, providing a service or conducting a
transaction, Part 2 Section IV of FIA Instruction No. 2 creates exemptions to the general rule
provided by the Law.

457. According to the essential criteria for financial institutions, the verification of the identity of
the customer and beneficial owner may be completed after the establishment of the business
relationship only, provided that all of the following criteria are met cumulatively:

(a) The verification occurs as soon as reasonably practicable;

99

(b) The postponement is essential not to interrupt the normal conduct of business; and

(c) The money laundering risks are effectively managed (including the adoption of risk
management procedures).

458. In contrast with the essential criteria, the FIA Instruction No. 2 does not require that all the
above-mentioned conditions are met cumulatively but allows for completing CDD measures after
establishing a relationship simply when either condition (b) or (c) is met. This is considered as a
deficiency in the technical compliance with the essential criterion 5.14.

459. HS/VCS authorities stress that pursuant to Art. 2 of the Decree No. CLIX the adoption of this
Decree is without prejudice to the provisions contained in the regulations and instructions adopted
by FIA before 25 January 2012, in so far as they are compatible with it. According to the
authorities, the abovementioned provisions of FIA Instruction No. 2 are incompatible with the
revised AML/CFT Law and are therefore - based on the abovementioned principle contained in
Art. 2 of the Decree N. CLIX - not applicable.

460. However, given that the provisions contained in the regulations and instructions that are not
considered to be compatible with the Decree No. CLIX are nowhere expressly identified as such,
this is considered at least as an impediment to the proper application of the regulations and
instructions.

Failure to satisfactorily complete CDD before commencing the business relationship and after
commencing the business relationship

461. Prior to the amendments and additions to the AML/CFT Law promulgated by Decree No.
CLIX the obligation to examine the need to report an STR was limited to situations where a
business relationship was already established but did not cover situations where no relationship
was established following failure to satisfactorily complete CDD.

462. Pursuant to Art. 29 §4 of the revised AML/CFT Law it is forbidden to enter into the
relationship, provide the service, or conduct the transaction in question, whenever it is not
possible to fulfil the CDD requirements. Whenever the relationship is already ongoing, the
obliged subjects must terminate the said relationship. In all of these cases, the obliged subjects are
required to consider reporting the suspicious transaction to the FIA.

Existing customers

463. Prior to the amendments and additions to the AML/CFT Law promulgated by Decree No.
CLIX of 25 January 2012 there was no clear requirement in Law or Regulation or other
enforceable mean to apply CDD requirements to existing customers on the basis of materiality
and risk and to CDD on such existing relationships at appropriate times.

464. Under the revised AML/CFT Law, obliged subjects are clearly required to fulfil CDD
requirements as well for those relationships already in existence when the law entered into force
(Art. 28 §3 of the revised AML/CFT Law).

465. The IOR representatives met by the evaluators reported that a process of client database
review and update was commenced in November 2010. By the close of 2011, the Institute had
updated its client database module (Sintacs) with respect to approximately 50% of natural persons
and 11% of legal persons. The IOR representative are confident that they will conclude this task
by the close of 2012. Legal entities should be fully updated by December 2012, as well.

466. The evaluators were also informed that, as of 30 November 2011, there were 4,494 dormant
accounts (which correspond roughly to 18% of all accounts held) representing assets of €30.8
million. The term "dormant accounts" refers to accounts whose balances have been inactive for
more than five years and whose respective account holders could not be contacted. According to
the statistics provided to the evaluation team the dormant accounts are mainly related to
Congregations, Secular Clergy and Religious Men, Seminaries/Colleges, Bishops and
Foundations without Canonical Recognition.

100

467. According to the IOR Procedure "Customers account's status change" of October 2002, no
assets can be deposited in or withdrawn from these accounts before having received a written
request from the account's owner and the proper authorisation of the General Manager. In
addition, full customer due diligence must have been applied previously in accordance with the
revised AML/CFT Law. According to the representatives met, the IT system provides for
automatic constraints regarding the withdrawals and deposits on dormant accounts.

468. As laid out under essential criterion 5.1 above, it is prohibited to keep anonymous or ciphered
deposits or passbooks, or open accounts with fictitious or fantasy names. In addition, IOR
representatives emphasised that the IBIS core banking solution used by the IOR since 1996 does
not technically allow the use of anonymous or ciphered accounts. IOR and APSA representatives
stated that they have no evidence of the use of anonymous, accounts in fictitious names or
numbered accounts in the period prior to the coming into force of the AML/CFT Law.

Effectiveness and efficiency

469. As outlined in the overview of the financial sector there are two entities, namely the IOR and
APSA, which are of relevance under this part of this report. Considering the different scale and
nature of their financial activities (for further details please refer to the description in the
overview of the financial sector above) the evaluation team focused its effectiveness assessment
primarily on the IOR. A few remarks with respect to APSA can be found at the end of this
section.

470. The IOR representatives met by the evaluation team demonstrated a high level of awareness
and a good understanding of the obligations under the AML/CFT requirements. Furthermore, the
internal procedures drafted by the IOR, with the assistance of a major international accountancy
firm, specify in great detail the roles and responsibilities of IOR employees. Under
Recommendation 5 the "IOR-CDD Procedures" are of particular relevance. These procedures
were adopted shortly before the coming into force of the original AML/CFT Law on April 1,
2011.

47 1 . The IOR-CDD procedures go, to some extent, beyond the requirements set out by the Law in
force prior to the amendments and additions promulgated by Decree No. CLIX. The procedures
partly contain requirements which were missing or unclear in the original version of the
AML/CFT Law. This mitigates to some extent the negative impact on effectiveness due to the fact
that a significant number of elements in the legal framework were introduced only after the first
MONEYVAL on-site visit (see comments on very recent implementation below).

472. Parts of the IOR-CDD procedures are portrayed in the description and analysis section above.
As mentioned previously, they contain clearly defined documentation standards with respect to
each client category, which are considered to have a positive impact on effective implementation.

473. As an example, the documentary standards required for CDD taken from the IOR "CDD
Procedures" are set out below.

Documentation - Standard Legal Person Customer Due Diligence

Subject

Documentation to be

Documentation to be

Authorised

Documentation

Preventive

typologies

acquired in order to verify

acquired in order to

subjects

to be acquired in

approvals

that the client is compliant

verify client identity

order to verify

for establishing a client

authorised

relationship with the

subjects

Institute

Canonical

- Canonical

- Statute

- Subjects

- ID card,

- Preventive

Foundations

acknowledgement

- Statutory Bodies and

foreseen by

diplomatic ID

General

- Client relationship

Legal Representatives

Statute

card, driving

Manage-

establishment requested by

appointment decree

licence or

ment

Statutory Bodies

- Any legal recognition in
Italy

- ID card, diplomatic ID
card, driving licence or
passport

passport
- Delegation
conferment by
Statutory Bodies

approval

101

Vatican

- Control in Pontifical

- Control in Pontifical

- Subjects

- ID card,

-

Congregations

- Yearbook

Yearbook

foreseen by

diplomatic ID

- Client relationship

- Client relationship

Statute

card, driving

establishment requested by

establishment requested

licence or

Bodies foreseen

by Bodies foreseen
- ID card, diplomatic ID
card, driving licence or
passport

passport
- delegation
conferment

Bishops'

- Establishment decree or

- Statute

- Bishops'

- ID card,

-

Conferences,

control in Pontifical

- ID card, diplomatic ID

Conferences

diplomatic ID

Dioceses and

- Yearbook

card, driving licence or

- President

card, driving

Representative

- Canonical

passport

- Dioceses'

licence or

Departments

acknowledgement

Ordinary

passport

- Client relationship

- Institution

- Delegation

establishment requested by

Legal

conferment by

President /Ordinary /Legal

Representative

Statutory Bodies

Representative

474. The evaluators received a demonstration of the account opening procedures, which overall
appeared to be effectively implemented. The documents acquired in the CDD process are scanned
into the electronic customer database (Sintacs). The customer data is gathered by means of
account opening forms, which are predefined in the IOR CDD procedures. The completed form is
entered into another IT system (IBIS 2 ) which automatically produces a form with the data input
that is verified and signed by the client. Upon satisfactory receipt of all client data the account is
deemed open but the funds are blocked until all the documents are verified and authorised by the
Deputy General Director and the General Director.

475. The evaluators reviewed two customer files chosen and presented by the IOR Administrative
Secretariat (Registry Function). They contained all the identification and verification documents
with respect to the customer, the beneficial owner and authorised subjects ("delegati") as required
by law and by the above-mentioned IOR documentation standard.

476. As mentioned in the description and analysis section, the IOR launched a process of client
database review and update in November 2010. The IOR demonstrated clear commitment and
dedication to complete this process by the end of 2012. Six persons are involved in this project
and are actively approaching clients to receive updated information. By the close of 2011, the
Institute had updated its client database module (Sintacs) with respect to approximately 50% of
natural persons and 11% of legal persons. The overall quality of the documentation held with
respect to those customers could not be established.

477. The evaluation team has also been informed that as of 30 November 2011 there were 4,494
dormant accounts representing assets of €30.8 million, the accounts of which have been inactive
for more than five years and whose respective account holders could not be contacted so far.
However, the procedures in place (see under essential criteria 5.17 above for details) appear to be
effective to prevent withdrawals or deposits before CDD procedures in accordance with the
AML/CFT Law have been applied.

478. A significant concern to the evaluators is the risk categorisation currently applied by the IOR,
which appears to be inadequate. The risk categorisation applied by the IOR is purely based on the
client category to which the customer belongs. The different types of client category accepted by
the IOR have been classified into five different risk categories. Diplomatic Staff and Legal
persons without canonical recognition are considered to present the highest risk.

Risk
category

Client category

% total
position

Vatican Congregations, Apostolic Delegations and Nunciatures, Holy
See Departments and Assimilated

10.1%

1

Canonical Foundations, Beatification Causes, Securla and Religious
Congregations (Male and Female), Monasteries, Convents and Abbeys,
Bishops' Conferences, Dioceses and Repres. Depts, Parishes, Churches
and Pertinent Departments, Seminaries, Colleges, Various Entities,

80.1%

102

Cardinals, Bishops, Secular Clergy and Religious Men, Nuns

2

Embassy to the Holy See

0.1%

3

Holy See Employees and Assimilated, Holy See Retired Employees and
Assimilated, IOR Employees, IOR Retired Employees

4.2%

4

Lay Master of Ceremonies of the Holy See, Former Vatican Employee
and Former Diplomatic Staff to the Holy See

3.4%

5

Diplomatic Staff Accredited to The Holy See, Legal persons without
canonical recognition 63

2.1%

479. The current approach does not take into account geographic risk, product/service risk, type
and frequency of transactions, activity carried out, operative volumes, behaviour of the client, or
others. This is a particular concern having in mind the large volumes of cash transactions
(although, the evaluators fully appreciate that cash transactions are an important contributor to the
funding of the global mission of the Church) and wire transfers operated on behalf of several IOR
customers. For example, the client categories generating the highest volumes of cash transactions
are currently assigned the lowest risk levels; it was noted that these were mainly Roman Curia and
Governorate entities. The global spread of their customers' activities presents another risk factor,
which is hardly reflected in the risk categorisation. In addition, the gaps identified under SR. VIII
with respect to information available for NPOs present risks that are not appropriately mitigated
by the IOR risk categorisation.

480. The evaluation team has noted positively that the IOR has endeavoured to supplement its risk
categorisation with the above-mentioned risk factors. Moreover, to formalise these procedures,
the IOR is designing an algorithm to identify and assign a risk value for each client and will then
continuously monitor them. This algorithm will be used in all data systems of the IOR to
automatically manage risk assignments for every client 64 .

481. As a result of the inadequate risk categorisation enhanced due diligence measures appear to be
applied to a very limited number of customers. Furthermore, additional measures which are
currently applied, when it comes to the scrutiny of transactions and the origin of funds, seem
limited.

482. The requirement to apply enhanced due diligence for repeated transactions of deposit of cash
or valuables as set out in FIA Instruction No. 2 appears to be essential given the relevance of such
transactions within the IOR. However, this requirement is not yet implemented.

483. Furthermore, the exemption from any CDD (including ongoing monitoring) rather than
reduced or simplified CDD measures as suggested by the essential criteria, raises concerns with
respect to effective implementation. Particularly in the light of the CDD exemption regarding
public authorities, which account for an important share of IOR customers, this shortcoming
appears to be significant.

484. IOR representatives stress that, in the case of natural persons, an IOR account can only be
opened and held in the name of the beneficial owner of the account 65 . Accordingly, the IOR

Legal persons recognised under civil law but without canonical recognition. According to the IOR Internal
AML/CFT Policy legal persons without canonical recognition may not be accepted as customers. IOR
representatives stress that as of 2007 the IOR has not established relations with such a category. Such legal
persons are regarded as "legacy customers". According to the Overview "Clients by Industry Code distribution"
there are 995 clients falling under this category as of November 30, 2011; 51 of these accounts are qualified as
dormant accounts.

64 The HS/VCS authorities informed the evaluators that, on 27 April 2012, pursuant to Art. 28 bis of Decree no.
CLIX, the IOR approved a new procedure for AML risk profile attribution. The current procedure takes into
account, geographic risk, kind of transaction and type of the client. The algorithm is expressed into the updated
"Procedure for AML risk profile attribution".

65 IOR representatives state that joint tenancy accounts are not permitted. Hence in a case an employee dies, his
reversionary pension is paid on a new account in the name of the widower/ widow.

103

"CDD Procedures" (p. 54) maintain: "In case the client is a natural person, the beneficial owner
corresponds to the client, therefore it is not necessary to autonomously identify said subject." This
per se assumption does not appear not to be in line with the Standard. In general, it can probably
be assumed, that the client is the beneficial owner of the assets deposited with his account.
However, there may be exceptions to this rule, which will not be identified as such if the obliged
subject relies on the automatic assumption described above 66 .

485. The IOR CDD procedures set out that the Institute does not apply CDD to national public
entities, which includes institutions listed in the "Annuario Pontificio" under section "Roman
Curia", "Pontifical Representations" and "Institutions connected to the Holy See".

486. The proper identification and verification of persons purporting to act on behalf of a customer
is essential to prevent the illegitimate use of customer relationships. In the light of this, it raises
significant concerns that according to the IOR CDD procedures, no CDD has to be applied to
"unempowered presenters" (persons who, with reference to a specific transaction, express only
the intentions of the subject to whom the client relationship refers and do not exercise any will or
take part in the execution process); the IOR representatives state that normally, it is verified by
telephone or mail whether the unempowered presenter expresses the intention of the subject to
whom the client relationship refers. However, this is not explicitly required by the IOR
procedures and the identity of the unempowered presenter should nevertheless be identified and
verified, as required by the AML/CFT Law and the FATF standard 67 .

487. The evaluators have taken note of this strengthening of the legal CDD framework. From an
effectiveness point of view it has to be noted that those requirements have been introduced or
clarified very recently. However, the evaluators have taken into account, that some of those
requirements had at least been set out in the internal procedures adopted by the IOR shortly before
the original AML/CFT Law came into force on April 1, 2011.

488. Effective implementation may also be challenged given that the FIA Regulations and
Instructions are not yet aligned with the AML/CFT Law although Art. 2 of Decree CLIX does
clearly state that its adoption is without prejudice to the FIA's Regulations and Instructions. The
HS authorities and obliged subjects reported that they are in the process of examining and
determining the extent to which the FIA instructions and regulations are applicable.

489. A major concern relates to the fact that no on-site inspections have been carried out by the
supervisory authority. In particular, there has never been a sample testing of the CDD files
maintained by the IOR or an assessment of the scrutiny of transactions and the origin of funds
carried out by the IOR. Therefore, it is not possible to establish the effectiveness of the
implementation of the IOR CDD procedures. Furthermore, the supervisory authority appeared to
have a limited insight into the important IOR project of updating and reviewing existing
customers.

490. At the time of the first MONEYVAL on-site visit APSA had no internal procedures in place
with respect to the application of CDD requirements. After the second MONEYVAL on-site visit
the evaluation team was informed that, as of January 25, 2012 inter alia, a procedure for the
prevention and countering of the laundering of proceeds resulting from Criminal activities and
financing of terrorism has been adopted. Given the different scope of financial activities the
procedures are not as detailed as the respective procedures of the IOR. In essence, the APSA
internal procedures mainly reiterate the obligations set out by the AML/CFT Law and provide for
an assignment of the individual responsibilities within APSA. The procedures also foresee the

66 The HS/VCS authorities informed that on 26 May 2012, the IOR adopted a new form for the opening of
business relationships where it is mandatory that the client "declares, under his personal responsibility, (that) all
the money moved into the account belongs to himself and (that) there are not any other beneficial owners."

67 The HS/VCS authorities informed the evaluators that, on 21 May 2012, the IOR adopted a directive
eliminating the "unpowered presenter". Consequently, the only persons now authorised to perform transactions
are: the owner, the delegate, and the person encharged, all of whom are subject to CDD.

104

establishment of an AML Office under the Extraordinary Section and a newly appointed Head of
AML is tasked inter alia with monitoring the functionality of procedures, structures and systems,
and providing support and advice on managerial decision-making. It must be stressed that the
APSA representatives demonstrated a good understanding of their obligations under the
AML/CFT Law. However, the formalisation of CDD procedures appears to be at a rather early
stage.

Recommendation 6

Risk management systems, senior management approval, requirement to determine source of wealth
and funds and on-going monitoring

491. Prior to the amendments and additions to the original AML/CFT Law promulgated by Decree
No. CLIX the above-mentioned measures had to be applied only to politically exposed persons
residing in a foreign State, while the essential criteria refers to persons entrusted with prominent
public functions in a foreign country irrespective of the residence. Furthermore, the procedure to
determine a politically exposed person had to be applied "in risky situations" only, while the
Essential criteria do not provide for a risk based approach. Finally, there was no requirement to
obtain senior management approval, where a customer has been accepted and the customer or
beneficial owner is subsequently found to be, or subsequently becomes a PEP.

492. "Politically exposed persons" are defined in Art. 1 §18 of the revised AML/CFT Law as
persons who are or who have been entrusted with prominent public functions, as well as their
immediate family members and those with whom they publicly maintain a close association.

493. Persons entrusted with prominent public functions are according to Art. 2 of the Annex to the
revised AML/CFT Law:

a) the Heads of State, Heads of Government, Ministers, Vice-ministers, Under-Secretaries, and
persons who exercise similar functions;

b) the Members of Parliament;

c) the members of the Supreme Courts, the Constitutional Courts and other high ranking judicial
organs, whose decisions are generally not subject to further appeal, and the persons who
exercise similar functions;

d) the members of State Auditors' Courts and of the Board of Directors of the Central Banks, and
the persons who exercise similar functions;

e) the Ambassadors, Charges d'affaires, and the High-ranking Officers of the Armed Forces, and
the persons who exercise similar functions;

f) the members of the Boards of Directors, management or supervisory organs of State-owned
enterprises, and the persons who exercise similar functions.

494. Middle ranking or more junior individuals do not fall within any of the foregoing categories.
The categories referred to in subparagraphs a) and f) include, if applicable, the functions exercised
at the international and European levels.

495. The term "family members" comprises the spouse, the offspring and their spouses, those who
during the last five years cohabited with the politically exposed person, as well as the parents.

496. The term "persons with whom they publicly maintain close relationships" is specified as any
natural person who publicly shares with a politically exposed person the role of beneficial owner
of legal persons or who has with him/her any other close business relationship. In addition, it
comprises any natural person who is the sole beneficial owner of a legal person publicly created
for the benefit of a politically exposed person.

497. A person no longer holding prominent public offices for a period of at least one year is not to
be considered as a PEP. However, it is clearly stated in the same provision that this is without

105

prejudice to the general obligation to apply enhanced due diligence on the basis of the assessment
of the existing risk (Art. 2 §4 of the Annex of the revised AML/CFT Law).

498. The FATF plenary has considered the one-year limit in the context of an EU member state's
mutual evaluation report, and has concluded that such a threshold is not a material deficiency
when there is a general obligation to apply enhanced due diligence to customers (including PEPs)
who still present a higher risk of ML or TF regardless of any timeframe. Such an obligation is
provided in Art. 31 (1) of the revised AML/CFT Law.

499. Regarding the relationships established with politically exposed persons, as well as the
services and transactions conducted in their name and on their behalf, the obliged subjects are
required pursuant to Art. 31 §5 of the revised AML/CFT Law to:

a) put in place appropriate procedures to determine whether the counterpart is a politically
exposed person;

b) before establishing a relationship, providing a service, or conducting a transaction, obtain the
approval of the responsible superior or director or from his delegate. If the counterpart
subsequently acquires the status of a politically exposed person, such an approval shall be
required in order to maintain the relationship;

c) adopt every reasonable measure to establish the source of the currency, funds and other assets
used;

d) conduct enhanced and ongoing monitoring 68 .

500. The above-mentioned obligation to put in place appropriate procedures to determine whether
the counterpart is a politically exposed person, does not extend to the case of the beneficial owner.
Furthermore, the FATF standard does not provide for the possibility of delegating the senior
management approval for establishing business relationships with a PEP. While the HS/VCS
authorities take the view that the requirement to establish the source of funds implies establishing
the source of wealth (as required by criterion 6.3), this requirement should be expressly stipulated.

Additional elements

Domestic PEP-s - Requirements

501. Prior to the amendments and additions to the original AML/CFT Law promulgated by Decree
N. CLIX the obligations regarding PEPs had to be applied only to PEPs residing in a foreign state.
Given that most persons holding prominent functions domestically do reside in VCS, the clear
majority of persons holding prominent functions domestically was not covered by the former
provision. This former limitation has been eliminated by Decree N. CLIX which does not
distinguish between persons who hold prominent functions domestically and those holding
prominent functions in another country.

Ratification of the Merida Convention

502. The HS has not yet signed the 2003 United Nations Convention against Corruption.
Effectiveness and efficiency

503. In 2004, the IOR entered into licence agreements with an internationally renowned PEP
database provider. As part of its initial customer due diligence the IOR checks all potential
customers against this database. In addition, the client database is scanned against the database on
a daily basis. The IOR was able to demonstrate recent examples where the system has identified
persons who became a PEP after the customer relationship has been established. Transactions are
also scanned against the PEP database. Apart from these IT assisted procedures, the customer has
to indicate in the form applied for the account opening procedure whether he qualifies as a PEP.

68 HS/VCS authorities have clarified that delegates of the responsible superior of both the IOR and APSA are
part of the senior management.

106

504. The requirement to determine whether the counterpart is a PEP as set out in the IOR CDD
procedures goes beyond the requirement of the AML/CFT Law, as it is extended to authorised
persons (but not to the beneficial owner). However, the procedures are based on the PEP
definition contained in the AML/CFT Law prior to the amendments promulgated by Decree No.
CLIX, which is limited to customers residing in a foreign country and therefore not fully in line
with the standard. Persons who perform institutional activities abroad (e.g. Apostolic Nuncios) are
not considered by the IOR to be resident in a foreign country. Accordingly, based on the former
PEP definition only very few customers have been identified as PEPs.

505. As outlined in the description and analysis section, the PEP requirements now have to be
applied to all PEPs, irrespective of their residence. This extended requirement has not been
implemented yet.

506. The approval for establishing or continuing a relationship with a counterpart identified as a
PEP has to be requested form the General Management in the case of the IOR. The
Administrative Secretariat (Registry Function) is required to obtain information on the source of
funds (e.g. earned income, inheritance) of a PEP and to collect support documentation. In the case
of ecclesiastic customers the IOR considers a self-statement regarding the funds to be sufficient.
With respect to laymen a self-statement and suitable support documentation (e.g. income tax
return or other documentations indicating earned income, copy of last will, embassy's letter, etc.)
has to be requested.

507. APSA's internal procedures do not contain provisions with respect to the application of PEP
requirements. Effective implementation (in particular in the light of the extended PEP
requirement) could not therefore be fully established.

Recommendation 7

Requirement to obtain information on respondent institutions & Assessment of AML/CFT controls in
Respondent institutions

508. In the case of correspondent current accounts of foreign banks or credit or financial
institutions, the obliged subjects are, pursuant to Art. 31 §4 a) of the revised AML/CFT Law,
required to gather sufficient information regarding the correspondent institution to understand
fully the nature of its activities and to determine - from publicly available registries, lists, records
and documents - its reputation and the quality of the supervision to which it is subject.

509. In addition, they are required to assess the soundness of the legal system, requirements and
controls in force in the foreign State regarding the prevention and countering of ML and FT (Art.
31 §4 b) of the revised AML/CFT Law). However, there is neither an explicit requirement to
assess whether a correspondent body has been subject to a ML/TF investigation or regulatory
action nor to assess the respondent institution's AML/CFT controls, and to ascertain that they are
adequate and effective.

Approval of establishing correspondent relationships

510. Pursuant to Art. 31 §4 c) of the revised AML/CFT Law the obliged subjects are required to
obtain, before opening an account, the approval of the responsible superior or director or from his
delegate 69 .

Documentation of AML/CFT responsibilities for each institution

511. Pursuant to Art. 31 §4 letter d) of the revised AML/CFT Law the obliged subjects are required
to define in written form the terms of the contract with the corresponding institution, including
their respective rights and duties.

Payable through Accounts

' HS/VCS authorities have clarified that delegates of the responsible superior of both the IOR and APSA are
part of the senior management.

107

512. Pursuant to Art. 31 §4 e) of the revised AML/CFT Law the obliged subjects have to be certain
that the correspondent institution has verified the identity of and performed ongoing due diligence
of any counterpart having direct access to payable-through accounts, and that it is able to provide,
upon request, the relevant data obtained while fulfilling those same requirements.

Effectiveness and efficiency

513. The IOR operates only as a respondent institution, and as such the IOR is only a customer of
correspondent banks but does not itself provide correspondent banking services. At the time of the
MONEYVAL on-site visits the IOR used the correspondent bank services of more than 40
correspondent banks. Given that the IOR only acts as a respondent institution, most of the above-
mentioned obligations do not have to be applied by the IOR. However, the IOR is obliged to
define in written form the terms of the contract with the corresponding institution, including their
respective rights and duties. The evaluation team has been provided with several examples of
such contracts, which clearly defined the responsibilities and rights of the correspondent and the
respondent institution.

514. Moreover, the IOR Internal AML/CFT Policy sets out that the IOR commits to operate
directly, and to establish commercial relations of any kind, only with correspondent institutions
that have equivalent requirements, and were previously approved by the Board of
Superintendence. As far as "payable-through accounts" are concerned, it has to be stressed that
neither the IOR nor APSA maintain such accounts. The only persons entitled to operate accounts
held by those entities in a correspondent bank are the members of the top management (the
authorised persons are listed in a book of signatures). No other persons are authorised to use these
accounts.

515. The evaluation team did not find any indications of an inadequate implementation of the
relevant requirements und Rec. 7.

Recommendation 8

Misuse of new technology for ML/FT

516. Prior to the amendments and additions to the original AML/CFT Law promulgated by Decree
N. CLIX the requirements of Recommendation 8 were not contained in Law or Regulation or
"other enforceable means".

517. Pursuant to Art. 2 ter §1 of the revised AML/CFT Law, the obliged subjects are required to
adopt adequate policies, organisation, measures and procedures to prevent and counter ML and
FT, on the basis of the development of new technologies and of the phenomena of money
laundering and the financing of terrorism.

518. Furthermore, the obliged parties are required, pursuant to FIA Instruction No. 1, to take into
account technological progress and financial innovation when preparing effective organisational
and computerised tools in order to guarantee an adequate protective scheme against ML and FT
risks. Furthermore, FIA Instruction No. 1 (see Annex XXII) requires that the staff training is
reviewed regularly and should take into account progress made in the fields of technology and
financial innovation.

Risk of non-face-to-face business relationships

519. In non-face to face relationship, the obliged subjects are, pursuant to Art. 31 §2 of the revised
AML/CFT Law, required to apply one or more of the following measures:

a) verify the identity of the counterpart in the relationship through additional information,
including documents, data, and information obtained from a reliable and independent source;

b) adopt additional measures to verify and certify the documents provided, or require for those
documents a confirming certification by a credit or financial institution subject to customer
due diligence requirements equivalent to those set forth in this law;

108

c) require that the transaction's first payment be carried out through an account in the
counterpart's name in a credit or financial institution subject to customer identification and
verification requirements equivalent to those set forth in this law.

520. For remote operations implemented by systems of telephone or computerised communication
FIA Instruction No. 2 requires specific attention on the part of obliged parties. In cases of remote
operations, the obliged parties are required to acquire an appropriate identification document
delivered by fax, by post or a scanned copy and to acquire and analyse one or more of the
following documents, from which it is possible to draw identifying data and further information
required for the purposes of customer due diligence:

• public deeds, certified private documents;

• certificates used to produce a digital signature associated with computerised documents;

• declaration of the diplomatic mission of the Holy See.

521. The exemptions from CDD provided by Art. 31 §3 of the revised AML/CFT Law (in
particular with respect to ongoing monitoring), which are described under criterion 5.9 are even
applicable for non-face-to-face transactions, as expressly stated in the AML/CFT Law. Therefore,
the same concerns as raised above apply.

Effectiveness and efficiency

522. Given that a substantial number of IOR customers are located in foreign countries, business
relationships established without physical presence are of importance. Such relationships are
concluded through the post. The IOR does not provide Internet banking services. Non-face to face
transactions provided by IOR include the use of ATM machines, telephone banking, transmission
of instructions via fax and making payments as part of electronic point of sale transactions using
account-linked bank cards. IOR officials stress that these instruments are considered as new
technologies as mentioned under Art. 2 ter §1 of the revised AML/CFT Law. The measures and
procedures to address the risks related to these technologies overlap largely with the procedures
mentioned below for non-face to face transactions. Transactions conducted through the use of
those technologies are particularly monitored.

523. Where business relationships are established without a physical presence, the IOR usually
requires a confirming certification (e.g. the identities of bishops or priests have to be certified by
the relevant Apostolic Nunciature or Dioceses).

524. Security procedures have been established for non-face to face transactions such as the supply
of access codes for confirming transactions, signature verification procedures for orders made by
telephone and use of call-backs to confirm transactions.

525. Staff training and the internal procedures are being reviewed regularly to take into account
ML threats that may arise from new technologies.

526. APSA's internal procedures do not contain provisions with respect to non-face to face
transactions and business relationships. Effective implementation could not therefore be fully
established.

3.2.2 Recommendations and comments

527. The AML/CFT Law needs to be amended to specifically require that financial institutions
should determine whether the customer is acting on behalf of another person.

528. The AML/CFT Law needs to be amended to specifically require that financial institutions
should verify that the transactions are consistent with the institution's knowledge of the source of
funds, if necessary.

109

529. HS/VCS authorities should undertake a formal risk assessment and should in particular review
if the circumstances for simplified and enhanced due diligence are appropriate for the local
environment/peculiarities.

530. It is recommended that serious consideration should be given to a statutory provision
describing the types of legal and natural persons eligible to maintain accounts in the IOR and
APSA.

531. HS/VCS authorities should amend the exemptions for low-risk customers, products and
transactions as adopted from the Third EU AML Directive by clarifying that minimum CDD (i.e.
less detailed CDD) should nevertheless be accomplished.

532. HS/VCS should set out that simplified CDD measures are not permissible where higher risk
scenarios apply.

533. HS/VCS authorities should clarify in the AML/CFT Law that the FIA may authorise
simplified CDD measures with respect to listed companies only if they are subject to regulatory
disclosure requirements.

534. HS/VCS authorities should amend FIA Instruction No. 2 to clarify that the verification of the
identity of the customer and beneficial owner, following the establishment of the business
relationship, should only be permissible where all conditions mentioned under criterion 5.14 are
met cumulatively.

535. HS/VCS authorities should abolish the exemptions to CDD provided under Art. 31 §3 of the
revised AML/CFT Law.

536. Where the Law allows for simplified or reduced CDD measures to customers resident in
another country, HS/VCS authorities should limit this in all cases to countries that the HS/VCS is
satisfied are in compliance with and have effectively implemented the FATF Recommendations.

537. The FIA Instructions should be amended to require that verification should occur as soon as
possible in situations where verification occurs after establishment of a business relationship.

538. The provision that only transactions executed within a period of seven days have to be
considered as "linked transactions" should be abolished.

539. HS/VCS should introduce an express requirement to verify that the transactions are consistent
with the institution's knowledge of the source of funds where necessary.

540. HS/VCS should extend the requirement to put in place appropriate risk management systems
to determine whether the counterpart is a politically exposed person to the case of the beneficial
owner.

541. HS/VCS authorities should extend the requirement to establish the source of funds of
customers and beneficial owners identified as PEPs to expressly include the establishment of their
wealth.

542. The AML/CFT Law should be amended to introduce an express requirement to assess whether
a correspondent body has been subject to a ML/TF investigation or regulatory action or to assess
the respondent institution's AML/CFT controls, and to ascertain that they are adequate and
effective.

543. HS/VCS authorities should eliminate the exemptions from CDD provided by Art. 31 §3 of the
revised AML/CFT Law (in particular with respect to ongoing monitoring).

544. FIA should raise awareness with respect to the obligations that have been introduced or
clarified in the AML/CFT Law after the MONEYVAL on-site visits to ensure effective
implementation.

545. Most importantly, FIA should put in place appropriate arrangements to monitor and ensure
compliance with the requirements under R. 5 to 8 (including adequate sample testing).

110

3.2.3

Compliance with Recommendations 5 to 8

Rating

Summary of factors underlying rating

R.5

PC

• No requirement to verify that the transactions are consistent with the
institution's knowledge of the source of funds, if necessary.

• Failure to have undertaken any formal risk assessment implies that
there is no basis for determining whether potential risks are addressed
appropriately by the current risk based approach in place.

• Rather than providing for simplified due diligence measures, the
AML/CFT Law creates blanket exemptions from the CDD
requirements.

• The AML/CFT Law allows for simplified CDD measures even where
higher risk scenarios apply.

• Where obliged subjects are permitted to apply simplified or reduced
CDD measures to customers resident in another country, this is not
always limited to countries that the HS/VCS is satisfied are in
compliance with and have effectively implemented the FATF
Recommendations.

• The FIA Instruction allows for the verification of the identity of the
customer and beneficial owner following the establishment of the
business relationship without all conditions mentioned under criterion
5.14 being met cumulatively.

• The definition of "linked transactions" is not in line with the Standard,
which does not provide for a limitation in respect of the time elapsing
between transactions.

Effectiveness

• The following requirements have been introduced or clarified too
recently to be considered fully effective 70 :

• The requirement to undertake CDD measures when carrying out
occasional transactions that are wire transfers in the circumstances
covered by the Interpretative Note to SR VII.

• The requirement to verify that any person purporting to act on
behalf of the customer is so authorised, and to identify and verify
the identity of that person.

• The requirement to verify the legal status of the legal person or
legal arrangement as required by the Standard.

• The clarification of the requirement to verify the identity of the
beneficial owner as required by the Standard.

• The requirement to understand the ownership and control structure
of the customer.

However, it has to be taken into account, that some of those requirements had been incorporated earlier in the
IOR internal procedures.

Ill

• The requirement to perform scrutiny of transactions undertaken.

• The requirement to apply CDD requirements to existing customers
on the basis of materiality and risk and to CDD on such existing
relationships at appropriate times.

• The requirement to examine the need to report an STR in situations
where no relationship was established following failure to
satisfactorily complete CDD.

• Further effectiveness concerns with respect to some criteria (see
shortcomings identified under "Effectiveness and efficiency")

R.6

PC

• The requirement to put in place appropriate risk management systems
to determine whether the counterpart is a politically exposed person
does not extend to the case of the beneficial owner.

• Beyond the requirement to establish the source of funds of customers
and beneficial owners identified as PEPs there is no express
requirement to establish the source of their wealth.

Effectiveness

• The following requirements have been introduced or clarified too
recently to be considered fully effective:

• the requirement to apply PEP requirements irrespective of the
residence.

• the requirement to obtain senior management approval, where a
customer has been accepted and the customer or beneficial owner
is subsequently found to be, or subsequently becomes a PEP.

• the requirement to determine a PEP in all instances, irrespective of
"risky situations".

R.7

LC

• No express requirement to assess whether a correspondent body has
been subject to a ML/TF investigation or regulatory action nor to
assess the respondent institution's AML/CFT controls, and to ascertain
that they are adequate and effective.

R.8

PC

• Undue exemptions from the CDD requirements, in particular with
respect to ongoing monitoring (due to Art. 31 §3 of the revised
AML/CFT Law).

Effectiveness

• The following requirements have been introduced or clarified too
recently to be considered fully effective:

• The requirement to have policies in place or take such measures as
may be needed to prevent the misuse of technological
developments in ML or TF schemes.

• The measures to be applied to manage risks related to non-face to
face relationships were not fully appropriate to do so.

112

3.3 Third Parties and Introduced Business (R. 9)

3.3.1 Description and analysis

546. The original AML/CFT Act did not permit reliance on intermediaries or other third parties to
perform elements of the CDD process or to introduce business. The CDD and record-
requirements described under Recommendations 5 and 10 have to be performed by the obliged
subjects themselves. In jurisdictions where third party reliance is permitted financial institutions
are (pursuant to R. 9) only required to satisfy themselves that copies of identification data and
other relevant documentation relating to CDD requirements will be made available from the third
party upon request. In contrast to this privilege, the subjects obliged under the AML/CFT Law
have to preserve themselves the documents, data and information obtained while fulfilling CDD
requirements. The Law does not provide for exceptions to this rule. Violations of this requirement
are sanctionable pursuant to Art. 42 of the revised AML/CFT Law. The evaluation team has not
found any evidence that obliged subjects do not comply with the AML/CFT Law by relying on
third parties to perform elements of the CDD process.

3.3.2 Recommendation and comments

547. No comments or recommendations are necessary.

3.3.3 Compliance with Recommendation 9

Rating

Summary of factors underlying rating

R.9

N/A

3.4 Financial institution secrecy or confidentiality (R.4)

3.4.1 Description and analysis

Inhibition of Implementation of FATF Recommendations
Legal Framework

548. As set out below, there exist three different levels of secrecy rules. The HS/VCS Authorities
state that these three levels are in fact the same three levels which generally exist in any other
legal orders: The first level is that of "financial secrecy", which presumptively protects the
confidentiality of a person's private financial data from access by unauthorised third parties. The
second level, is that of the office secret, or "official secrecy", which is likened to the kind of
secrecy which obtains for public offices and public officials and protects against the disclosure of
information related to a matter being handled by a governmental office and whose release to third
parties is unauthorised, which protects the unauthorised disclosure of information held by public
offices where not authorised by law. The third level is that of State Secrecy and the Pontifical
Secret.

549. The HS/VCS authorities stress that the revised AML/CFT law has addressed the question of
how the law relating to secrecy is expressed in the legal system by an explanation of the

113

confidentiality and secrecy rules. The authorities contend that this has introduced more
transparency to all of the relevant rules operating within the legal system.

550. The HS/VCS authorities further explain that these various forms of secrecy are not set out in
the AML/CFT law to present barriers to the operation of the AML/CFT law. This was intended to
identify those levels of secrecy to be clear that their existence cannot inhibit the legitimate
exercise of the powers of any of the competent authorities to access information necessary to any
AML/CFT inquiry. This is also indicated by the legislative intent expressed in the preamble to the
law to create a properly functioning AML/CFT system.

Financial secrecy

551. Pursuant to Art. 37 bis, §1 of the revised AML/CFT Law all notices, information and data
held by the obliged subjects, their legal representatives, administrators, directors, employees,
consultants, and collaborators on any grounds, by virtue of the exercise of the activities that are
subject to the AML/CFT Law, shall be protected by financial secrecy. Violations of this
obligation are subject to administrative sanctions ranging from €10,000 to €250,000 for natural
persons, and from €10,000 to €1,000,000 for legal persons (Art. 42 of the revised AML/CFT
Law). It has to be highlighted that only the obliged subjects are bound by this financial secrecy
provision but not the competent authorities which may be in the possession of such information.

552. The HS/VCS authorities explain that the purpose of this provision of the revised AML/CFT
Law is to afford the ordinary level of protection of financial information, that is typically afforded
to customers of financial institutions 71 .

Official secrecy

553. Art. 40 §1 of the revised AML/CFT Law: "All information held by the competent authorities
shall be subject to official secrecy without prejudice to the activities of the Judicial Authorities in
case of criminal proceedings".

554. The concept of official secrecy is defined by Art. 36, §1 of the General Regulation of the
Roman Curia (see Annex IX) according to which all members and employees of the Roman Curia
"are obliged to strictly observe official secret. They cannot therefore give to those who are not
entitled information regarding documents and news that they have gained as a result of their
work". This rule protects confidentiality in a manner consistent with governmental confidentiality
rules for all members of the Roman Curia, which includes the authorities competent in matters of
prevention and countering of the laundering of proceeds from criminal activities and financing of
terrorism.

555. Violations of the official secrecy are prohibited according to the general norms of the legal
system and, in particular, by Arts. 70-85 of the General Regulations of the Roman Curia, by Arts.
50-69 of the General Regulations for the personnel of the VCS and, as to the IOR, Arts. 43-50 of
the General Regulations of the personnel of the IOR. These sanctions do not exclude other civil or
criminal sanctions.

Ability to access information

556. According to Essential Criterion 4.1 countries should ensure that financial institution secrecy
laws do not inhibit the implementation of the FATF Recommendations. An area where this may
be of particular concern is the ability of the competent authorities to access information they
require to properly perform their functions in combating ML or FT.

71 According to the authorities this is also reflected by Art. 37, §2 AML/CFT Law, according to which: "(...)
exchanges of information between the FIA and the Judicial Authority, shall be conducted (...) so as to
safeguard the security and integrity of the information".

114

557. According to Art. 37 bis, §2 of the revised AML/CFT Law financial secrecy "shall not
obstruct the activities and the requests for information from the authorities competent for the
prevention and countering of money laundering and the financing of terrorism".

558. With respect to the authorities that would fall under this provision Chapter I bis of the revised
AML/CFT Law, entitled "Competent authorities" gives an important indication. It mentions the
following authorities:

• Secretariat of State;

• Pontifical Commission of the VCS;

• Financial Intelligence Authority;

• Gendarmerie.

559. The evaluators conclude that there is a clear legal exemption from the obligation to observe
financial secrecy with respect to those authorities.

560. The Judicial Authority (that is, the Promoter of Justice, the Single Judge, the Tribunal, etc.) is
not explicitly mentioned as a "competent authority" under Chapter I bis of the revised AML/CFT
Law. However, it has to be taken into account that in the revised AML/CFT Law a clear
responsibility has been assigned to the Judicial Authority as regards the sanctioning of money
laundering and the financing of terrorism. Moreover, the Judicial Authority is explicitly
mentioned by Arts. 37 §3 and 40 §1 of the revised AML/CFT Law. Therefore, it can be argued
that the Judicial Authority represents an "authority competent for the . . . countering of ML and
FT" as required by Art. 37 bis §2 of the revised AML/CFT Law. As a consequence, financial
secrecy cannot be opposed in respect of requests for information by the Judicial Authority. In
addition, it is noted that the Gendarmerie is empowered to conduct investigations on behalf of the
Promoter of Justice. Notwithstanding this, the HS/VCS authorities should consider adding the
Judicial Authority to the list of competent authorities in Chapter I bis of the revised AML/CFT
Law in order to eradicate any potential doubts.

Domestic exchange of information between competent authorities

561. The legal framework for the exchange of information is governed by Art. 40 of the revised
AML/CFT Law. This information exchange mechanism is analysed under Rec. 31.

562. All information held by the competent authorities shall be subject to official secrecy, without
prejudice to the activities of the Judicial Authority in case of criminal proceedings (Art. 40 §1 of
the revised AML/CFT Law). At the same time, the competent (domestic) authorities shall co-
operate actively and exchange relevant information for the prevention and countering of money
laundering and the financing of terrorism (Art. 40 §2 of the revised AML/CFT Law).

563. As outlined above, the concept of official secrecy is defined by Art. 36, §1 of the General
Regulation and only prohibits giving information to those who are "not entitled". HS/VCS
authorities argue that the competent authorities are "entitled" to such information based on the
empowerments established by the AML/CFT Law, which are described under Rec. 26 (FIU),
R.28 (Powers of competent authorities) and R.29 (Supervisors) and can therefore be shared
amongst "entitled authorities". Accordingly, the exchange of information amongst competent
domestic authorities appears not to be inhibited.

564. Furthermore, Art. 40, § 4 of the revised AML/CFT Law, establishes that provisions related to
the exchange of information "shall be applied without prejudice to the norms in force regarding
Pontifical Secret and State Secret". With respect to confidentiality rules established under the
Pontifical Secret, it is observed that this does not cover financial matters. It does cover
information related to the institutional activity of the universal Church, like the identity of
Cardinals or the identity of Bishops the Supreme Pontiff is going to appoint. Therefore, the
Pontifical Secret appears not to limit the power of competent authorities to exchange information
relevant to the prevention and countering of ML and FT. The Pontifical Secret might be
considered, mutatis mutandis, as the Holy See's "State Secret" (see below).

115

565. With regard to "State Secret", Art. 107 §1 of the CC establishes a definition consistent with
the common understanding and practice of States, focused on domestic public order and
security 72 .

International exchange of information between competent authorities

566. The legal framework for the international exchange of information is governed by Art. 41 of
the revised AML/CFT Law. This information exchange mechanism is analysed under Rec. 40 and
allows for the exchange of information regarding suspicious transactions in matters of money
laundering and the financing of terrorism with similar authorities in other states, on the condition
of reciprocity and on the basis of Memoranda of Understanding.

567. Art. 41 §2 of the revised AML/CFT Law sets out that official secrecy and any eventual
restrictions on the communications shall not inhibit the "international exchange of information".
HS/VCS authorities stress that the term "any eventual restrictions" also comprises Art. 36, §1 of
the General Regulation of the Roman Curia. Accordingly, official secrecy and Art. 36, § 1 of the
General Regulation of the Roman Curia appear not to inhibit the international exchange of
information regarding suspicious transactions as provided for by Art. 41 §1 of the revised
AML/CFT Law. However, Art. 41 §1 of the revised AML/CFT Law does not allow for the
exchange of supervisory information. Accordingly, the exemption from official secrecy in §2 of
the same Article appears to be expressly provided with respect to the exchange of information
with other FIUs but not with other supervisors.

568. However, considering that neither the IOR nor APS A have branches or subsidiaries in foreign
countries, the need for international exchange of supervisory information appears to have a
limited scope. HS/VCS authorities informed the evaluators that the FIA already has established
contacts with foreign supervisors.

Exchange of information between regulated financial entities where required by R.7, R.9 and SR
VII

569. R.7: In practice, significant exchange of information takes place between IOR/APSA and
foreign financial institutions with whom they hold correspondent accounts. Those correspondent
accounts are used to transfer funds of IOR and APSA customers internationally. In addition,
cheques are issued on Italian correspondent banks.

570. However, there is no express exemption from the obligation to observe financial secrecy
where such exchange of information is required in this context.

571. As far as "payable-through accounts" are concerned it has to be stressed that neither the IOR
nor APSA maintain payable-through accounts. The only persons entitled to operate accounts held
by the IOR in foreign banks are the members of the IOR top management (the authorised persons
are listed in a book of signatures). No other persons are authorised to use these accounts.

572. R.9 : Recommendation 9 is not applicable within HS/VCS given that the AML/CFT Law does
not provide for reliance on intermediaries or other third parties to perform elements of the CDD
process or to introduce business. The CDD requirements described under Recommendation 5
have to be performed by the obliged subjects themselves.

573. SR.VII : Special Recommendation VII requires that a set of information relating to the
originator is included in the message or payment form accompanying the wire transfer. According
to the standard beneficiary institutions are required to adopt effective risk-based procedures for
identifying and handling wire transfers that are not accompanied by complete originator

72 „Anyone who reveals political or military secrets, relating the security of the State, either, communicating or
publishing documents or facts, drawings or other information related to military materials, fortifications or
operations; or facilitating in any way their knowledge, is punished by imprisonment of one to three years and a
fine of more than 2.000 Italian lire.

116

information. In EU member states wire transfers with missing or incomplete originator
information must be either rejected or complete originator information must be requested pursuant
to Art. 9 of Regulation (EC) 1781/2006. Therefore, in practice, the IOR and APSA would not be
able to order cross-border wire transfers on a continuous basis without providing full originator
information. The IOR has also provided evidence that information relevant under SR. VII (name
of the originator, the originator's account number and the originator's address) is exchanged in
practice. However, there is no express exemption from the obligation to observe financial secrecy
where the exchange of information is required by SR. VII.

Effectiveness and efficiency

574. There appears to be an area of tension between, on the one hand the increasing demand of
foreign correspondent banks for background information on financial operations 73 , which they
carry out on behalf of IOR clients, and on the other hand, the considerable interest on the part of
HS/VCS institutions for a high level of protection of their client's data. The IOR reports that in
particular Italian banks request increasingly detailed background information with respect to
operations carried out on behalf of IOR clients. According to HS/VCS authorities this increased
demand for information appears to be related to the instruction of the Bank of Italy to apply
enhanced due diligence to business relationships with the IOR. The information regularly
requested by Italian banks from the IOR includes, for example, additional details with respect to
the originator or beneficiary, the beneficial owner of the account for which the order was placed,
the source of funds, the purpose of the transaction, and other data.

575. The IOR representatives informed the evaluators that at an initial stage some of those requests
have been referred to the FIA, due to the fact that the information requested was beyond the scope
of what has contractually been agreed to be shared with those correspondent institutions.
However, most contracts of the IOR and APSA with correspondent financial institutions have
been amended in order to extend the scope of information that can be shared.

576. Evidence was provided to the evaluation team that comprehensive information (including
information covered by financial secrecy) has in fact been exchanged with foreign financial
institutions. However, in some cases there still appear to be differing views with respect to the
necessary extent and detail of information to be exchanged. IOR representatives stress that in
some instances correspondent banks request additional information on a systemic basis rather than
on a case to case basis. It appears that these differing views on the necessary extent and detail of
information contributed in some instances to the termination of business relationships either at the
initiative of the IOR or at the initiative of Italian correspondent banks.

577. It has to be reiterated that information protected by financial secrecy is in fact exchanged with
foreign financial institutions. However, in the light of above-mentioned considerations the
absence of a clear exemption from the financial secrecy obligation with respect to the exchange of
information with foreign correspondent banks raises concerns.

Recommendations and comments

578. HS/VCS should introduce an express exemption from the obligation to observe financial
secrecy with respect to the exchange of information with foreign financial institutions where this
is required to implement FATF Recommendations.

579. HS/VCS authorities should clarify FIA's powers to request information as recommended
under R. 26 and R. 29 to ensure that obliged subjects cannot refuse to comply with a request for
information based on the financial secrecy obligation.

73 Correspondent accounts are used to transfer funds of IOR and APSA customers internationally. In
addition, cheques are issued on Italian correspondent banks

117

580. HS/VCS authorities should clarify the FIA's power to exchange information with foreign
supervisory authorities to make sure that official secrecy cannot inhibit such information
exchange.

581. HS/VCS authorities should consider to add the Judicial Authority to the list of all competent
authorities in Chapter I bis of the revised AML/CFT Law in order to eradicate any potential
doubts.

3.4.2

Compliance with Recommendation 4

Rating

Summary of factors underlying rating

R.4

LC

• While in practice information covered by financial secrecy appears to
be exchanged with foreign financial institutions where this is required
to implement FATF Recommendations, there is no express exemption
from the obligation to observe financial secrecy with respect to such
information exchange and could therefore be challenged before the
court.

• Given that there is no clear empowerment for FIA to exchange
information with foreign supervisory authorities, it remains unclear
whether official secrecy could inhibit the information exchange with
other foreign supervisors.

3.5 Record Keeping and Wire Transfer Rules (R.10 and SR. VII)

3.5.1 Description and analysis

Recommendation 10

Record keeping & Reconstruction of Transaction Records

582. Prior to the amendments and additions to the original AML/CFT Law promulgated by Decree
N. CLIX the law did not empower a competent authority to request the obliged subjects to keep
those records for more than five years in specific cases and upon proper authority.

583. Pursuant to Art. 32 of the revised AML/CFT Law the obliged persons are required to preserve
the documents, data and information obtained while fulfilling the customer due diligence
requirements, so as to permit the Judicial Authorities to reconstruct the relationships, services and
transaction even in case of a criminal proceeding.

584. Regarding the relationships, services and transactions, the obliged subjects are required to
record and preserve for five years from the date of the termination of the relationship, of the
provision of the service or of the transaction: the identifying data of the counterpart, of the
beneficial owner, and of their delegates, the date of the transaction; its amount, the kind of
relationship, service or transaction; and the means of payment used. Regarding relationships, the
obliged subjects shall record also the purpose (Art. 33 §2 of the revised AML/CFT Law). The five
year period may be extended upon request of the Judicial Authorities.

585. The information has to be recorded without delay and, in any case, within 48 hours of the
provision of the service, the conduct of the transaction, or the establishment, change or
termination of the relationship.

118

586. FIA Instruction No. 2 Part 2 Section VII (see annex XXIII) specifies that obliged persons shall
keep the documents acquired in the course of customer due diligence in order to:

• show FIA the procedures followed and measures adopted in order to comply with legal
duties;

allow FIA to carry out analyses and in-depth checks;

•

allow them to be used for inquiries by the FIA, the Gendarmerie Corps and the Judicial
Authority.

Record keeping of identification data, files and correspondence

587. Prior to the amendments and additions to the original AML/CFT Law promulgated by Decree
N. CLIX there was no empowerment and no clear requirement to maintain records of the business
correspondence.

588. Regarding the customer identification and verification requirements, the obliged subjects are
required to preserve for five years from the date of the termination of the relationship, of the
provision of the service or of the transaction, any information and documents obtained, including
the correspondence, deeds and annotations made (Art. 33 §1 of the revised AML/CFT Law). The
AML/CFT Law does not explicitly mention that account files have to be recorded. The five year
period may be extended upon request of the Judicial Authorities.

Availability of Records to competent authorities in a timely manner

589. Pursuant to Art. 33 §5 of the revised AML/CFT Law the obliged subjects are required to adopt
record-keeping mechanisms that allow them to respond promptly and effectively to the inquiries
of the competent authorities within the 5 year retention period.

Effectiveness and efficiency

590. At the IOR the record-keeping process is supported by a computerised system. The IOR has
operated an electronic client registry and transaction recording system since 1996. In 2005, the
IOR created a customised client profile and data module used for all customers. This module is
used to maintain data for both natural and legal persons. The documents acquired in the CDD
process are scanned into the electronic customer database (Sintacs). The customer data is gathered
by means of account opening forms, which are entered into another IT system (NSII). The two IT
systems in use (NSII and Sintacs) work in parallel and any information is available online for the
whole front office.

591. It has to be stressed that the CDD details of authorised signatories and "encharged" persons
(persons entitled to execute a single ad hoc transaction, without a general proxy) are only
recorded in physical form. A project has been initiated in order to migrate this information to the
teller module of the IT system. The evaluators consider this measure to be essential to facilitate a
prompt response to inquiries by the competent authorities and in order to enhance the monitoring
of unusual transactions.

592. The IOR has a detailed internal procedure on clients' relationship and transactions registration
(see Annex XXVII) in place since March 2011. The requirement to record correspondence, deeds
and annotations, as newly introduced by Decree No. CLIX, is not yet reflected in the internal
procedures.

593. With respect to the recording of transactions the internal procedure requires the recording of
the same data as specified in the AML/CFT Law. According to the operating procedures adopted
by the IOR transactions above a minimum threshold of €9,999 must be maintained in a data
warehouse (archivio unico informatico). The data warehouse is used to monitor the transactions
executed by the clients and to identify potentially suspicious transactions. The database moreover
allows the compilation of elaborate statistics both for internal use or for the FIA, if requested. All
transactions executed are recorded and stored in the information systems for 10 years.

119

594. The transaction records appear to be sufficient to permit reconstruction of individual
transactions. There have been several requests for information by the FIA to IOR with respect to
specific transactions. No shortcomings have been brought to light in the process of those requests.
Authorities confirmed that the IOR was able to provide all necessary record details.

595. A modern electronic client registry and transaction recording system, sound internal
procedures and a clear organisational structure for record-keeping functions combined with a
thorough understanding of their duties by IOR representatives suggest an adequate
implementation of the record-keeping obligations within the IOR. On the other hand, the absolute
lack of any on-site inspections with respect to record keeping obligations, including sample
testing, raises concerns.

596. APSA representatives demonstrated awareness and understanding of the record-keeping
obligations under the AML/CFT Law. APSA also maintains a modern IT system for client and
transaction recording. As regards record keeping the internal AML/CFT procedures, adopted on 2
January 2012 by APSA after the first MONEYVAL on-site visit, mainly contain a reference to the
respective obligations of the AML/CFT Law without specifying the internal processes and
assigning clear responsibilities. The formalisation of record keeping procedures appears to be at
an early stage. Nonetheless the legal requirements appear to be implemented in practice.

SR.VII

597. Chapter VIII of Act No. CXXVII of 2010 deals with Data related to money transfers.
According to Art. 38:

a) The provisions of this Chapter, established by having regard to the principles and rules in
force in the European legal system, apply to the transfers of funds in any currency,
transmitted or received, by a provider of payment services. They aim to prevent, investigate
and identify cases of money laundering and financing of terrorism.

b) Rules are established in matters of duties of providers of payment services on the ordering
person and beneficiary, and the intermediary providers of payment services as well.

c) With regard to the transfer of funds, the customer due diligence concerning the completeness
of the ordering person information data, recording and keeping remain in force.

d) The FIA, in compliance with the principles set out in Regulation (EC) No. 1781/2006 of
November 15, 2006, on information on the payer accompanying transfers of funds, issues
provisions concerning the implementation of the provisions contained in this Chapter.

598. While this article in the original AML/CFT Law itself does not give much clarity on the
obligations, letter d is of particular importance. The FIU has issued provisions on November 14th
201 1, just before the first MONEYVAL on-site visit.

599. On the 25 th of January 2012 a new decree came into force promulgating amendments and
additions to the existing AML Law. The new Art. 38, dealing with Wire Transfers stipulates:

1. In the case of wire transfers, without prejudice to the thresholds and exemptions set forth in
Art. 28, §1 c (€1,000), the payment services providers of both the originator and the
beneficiary, as well as the intermediate payment services providers, shall observe the
customer identification, verification, registration, and conservation requirements regarding
originators:

a) name and surname;

b) date and place of birth;

c) address;

120

d) account number.

2. The FIA shall issue guidelines and implementation norms regarding wire transfers, on the
basis, inter alia, of the International and European norms in force.

600. The provisions in the guidance given by the FIU have not changed.

601. It is important to note here that the new Art. 38 stipulates 'that payment service providers
shall observe the requirements'. This way it practically requires payment service providers to
observe the more detailed requirements as set out in the guidance of the FIU, which will be
discussed below.

Other enforceable means

602. In general the provisions that the FIU has issued in Regulation No.4 (see Annex XX) appear
to be in line with the criteria as stipulated by the essential criteria of SR VII on several points. For
certain Recommendations, including SR VII, the FATF Methodology allows for the use of "other
enforceable means" rather than law or regulation to require the standards domestically, as long as
certain conditions have been met.

603. Those conditions are broadly that the language used in the document requiring the application
of the standard should be of a mandatory nature, that the document is issued by a competent
authority and that there are sanctions for non-compliance, which should be effective,
proportionate and dissuasive.

604. In order to assess this last condition, consideration should be given to the range of sanctions
available for legal and natural persons, the applicability in the case of breach of an AML/CFT
requirement, availability of evidence that sanctions have been applied in practice and the
possibility of an appeal if sanctions are applied.

605. Based on the original AML/CFT Law it was the sanctionability that was not fully satisfactory.
Art. 42 of the original AML/CFT Law gave the FIU the power to apply sanctions for certain
specified articles, which includes Art. 38 which is related to data on money transfers. So there are
administrative sanctions available. The available pecuniary administrative sanctions range from
€10,000 up to €250,000 for natural persons. This appears to be rather low in comparison with
other jurisdictions. There are no other administrative and disciplinary sanctions available.

606. In Art 42 of the revised AML/CFT Law the pecuniary administrative sanctions for natural
persons did not change and were retained in the same range (from €10,000 up to €250,000). No
other administrative sanctions are added. For legal persons though there were pecuniary
administrative sanctions added, ranging from €10,000 up to €1,000,000.

607. In the VCS there was no criminal or administrative liability for legal persons until the 25 th of
January of 2012 as in the view of the authorities, this would be inconsistent with the fundamental
principles of domestic law. With the enactment of the revised AML/CFT Law Art. 42 bis creates
administrative responsibility for legal persons for the crimes set out in Articles. 412 bis and 138
ter of the Penal Code.

608. In such cases administrative sanctions ranging from €20,000 to €2,000,000 can be imposed on
a legal person. In addition to the pecuniary administrative sanctions a temporary interdict to
exercise its activities shall be imposed if certain conditions have been met. Letter 5 stipulates that
this norm does not apply to domestic, foreign or international public authorities. Therefore,
although IOR is included, APSA, as a public authority, is not.

609. The revised AML/CFT Law creates the possibility for appeals in Art. 42.4 stipulating that 'the
person sanctioned may object to the decision of the FIA resorting to a single judge. If it is a legal
person, the entity sanctioned may resort against the natural person responsible for the violation' .

610. So far, the FIA has not imposed any administrative sanctions. Criminal sanctions are not
specifically provided for in the AML/CFT Law in cases of infringement of the several articles of

121

the original and revised AML/CFT Laws relating to Chapters other than II and III for natural
persons. Art. 9 of the Act on Sources of Law (see Annex XII) does however provide that:

Should any penal provision be lacking, and an act has been committed that offends the
principles of religion or morals, public order, personal security or safety of things, the judge
may refer to the general principles of the legislation to inflict pecuniary penalties up to €3,000,
or detention penalties up to six months, and apply, as the case may be, the alternative
sanctions indicated in Law of 14 December 1994, No. CCXXVII.

This is a unique solution which introduces the possibility of criminal sanctions in the most
egregious cases.

611. Although the new law is a substantial improvement by adding sanctionability for legal
persons, it still raises concerns regarding the effective, proportionate and dissuasive criminal, civil
or administrative sanctions for the following reasons:

a) as APSA is regarded as a public authority the newly introduced administrative sanctions
appear not to apply to it;

b) the existence of additional disciplinary sanctions for natural and legal persons is not explicitly
clear and not shown in practice;

c) sanctions are not available for directors and senior management; and

d) no sanctions have been applied so far.

612. In conclusion, the Regulations and Instructions:

address the underlying requirements necessary to establish an effective AML/CFT regime
clearly;

use language that underpins the stated requirements;

are issued by the FIA as the designated competent authority;

are established by the original AML/CFT Act and further endorsed by Art. 2 of Decree No.
CLIX which introduced the revised AML/CFT Law; and

carry sanctions (apart from the public authority exemption on sanctions, which means that
sanctions do not apply to APSA) although there are no explicit sanctions available for
directors and senior management.

613. Although the conditions for sufficient "effective, proportionate and dissuasive criminal, civil
or administrative sanctions" are not fully met, the evaluators consider that there are sufficient
grounds for considering the guidance issued by the FIU as "other enforceable means". In practice
the Regulations and Instructions are accepted by the relevant institutions as being binding and
carrying sanctions that would be applied, particularly within the unique constitution and
institutional framework of the HS/VCS. This means that the provisions in the guidance can be
taken into account for rating purposes.

FIU provisions as enacted on November 14' 2011 in Regulation No. 4

614. FIA Regulation No 4 regarding the transfer of funds is set out in Annex XX. This Regulation
clearly describes the obligations on payers, payees, payments service providers and intermediary
payment service providers regarding cross4)order and domestic transfers above €1,000.

615. The regulation does not apply to funds carried out by using credit or debit cards provided that
such transfers are accompanied by a unique identifier allowing the transaction not to be traced
back to the payer. It also does not apply to transactions below €1,000 or for payer withdrawals of
cash from their own account or where payer and payee are both payment service providers acting
on their own behalf.

122

616. In addition the Regulation stipulates in Art. 3.4 that it does not apply where debits between
both parties are authorised, enabling them to carry out payments using their accounts, provided
that the transfer of funds is accompanied by a unique identifier, which enables the natural or legal
person to be traced where truncated cheques are used or where funds are transferred to public
authorities for the payment of taxes, sanctions or other levies.

617. Art. 4 of the Regulation sets out a requirement to complete informative data concerning the
payer. Complete information is then defined as name, surname, address and account number. The
address may be replaced by date and place of birth of the payer, the customer identification
number or the national identity number. In the absence of the payer's account number, it should
be replaced with a unique identifier so as to enable tracing of the transaction back to its payer.

618. Art. 5 obliges the payment service provider of the payer to 'verify the completeness' of the
informative data before transferring the funds. Essential criterion 1 of SR.VII nevertheless
requires that financial institutions should verify the 'identity' of the originator. Verification of
completeness might be interpreted as ensuring that all the different types of information are
available, while the essential criteria requires ensuring that the identity is verified. This
verification obligation is therefore not entirely correct.

619. The standard under essential criterion 3 accepts that domestic transfers can include only the
originator's account number or a unique identifier. Art. 6 of the Regulation chooses the same
approach for all transfers of funds involving States having equivalent legislative schemes under
the condition that the information on request can be made available within three working days.
While the European Union is qualified as domestic for the purposes of this Special
Recommendation, the HS/VCS is not a part of the EU. The concept 'states with equivalent
legislative schemes' even broadens this approach 74 . For both reasons this means that the
Regulation is not in line with the requirement that for cross-border wire transfers of €1,000 or
more the ordering financial institution should be required to include full originator information in
the message or payment form accompanying the wire transfer.

620. Each intermediary and beneficiary financial institution is required to ensure that all originator
information is transmitted with the transfer. Art. 13 describes what to do when there are technical
limitations. While the standard refers to technical limitations for cross-border transfers, the
Regulation unfortunately chooses the same approach regarding states with 'no equivalent
legislation' .

621. There is no explicit requirement in the Regulation that ensures that non-routine transactions
are not batched where this would increase the risk of money laundering.

622. Art. 10 obliges the payment service provider of the payee to consider the lack or
incompleteness of informative data as a risk factor and whether this provides a reason for
submitting a report to the FIA.

623. Art. 33, para 5, letter a) of the original AML/CFT Law states that the FIA supervises the
observance of the duties established in matters of prevention and countering of money laundering
and financing of terrorism and issues provisions for the implementation of the rules contained in
this Act, including Art. 38. These responsibilities are reiterated in Art. 2 septies of the revised
AML/CFT Act.

624. Art. 42 (old) and Art 42 and 42 bis (new) of the AML/CFT Law provide for a range of
sanctions. Overall, as described earlier, there is still a lack of effective, proportionate and
dissuasive criminal, civil or administrative sanctions.

74 Instruction No. 3 regulates the identification of states considered as having an equivalent regime. It consists of
the member states of the EU and EEA, Australia, Brazil, Canada, Japan, Hong Kong, India, Republic of Korea,
Mexico, Russian Federation, Singapore, USA, Republic of South Africa, Switzerland, Mayotte, New Caledonia,
French Polynesia, Saint-Pierre and Miquelon, Wallis and Futuna, Aruba, Curacao, St Maarten, Bonaire, St
Eustatius and Saba.

123

625. The provisions in the Regulation are in line with the requirements of SR VII on several points.
In accordance with Art. 2 septies §9, the Regulation was published in Acta Apostolicae Sedis on 1
January 2012.

626. There are two areas where it appears that the Regulation is not in line with the standard. There
is no explicit requirement in the Regulation that ensures that non-routine transactions are not
batched where this would increase the risk of money laundering. In addition, beneficiary financial
institutions are not required to adopt effective risk-based procedures for identifying and handling
wire transfers that are not accompanied by complete originator information. In some cases, the
beneficiary financial institution should consider restricting or even terminating its business
relationship with financial institutions that fail to meet SR VII standards.

627. As the date of publication was immediately after the first MONEYVAL on-site visit the
effectiveness of implementation could not be assessed.

Internal procedures oflOR

628. Since 20 June 2011 the IOR has detailed procedures in place regarding the transfer of funds
which are largely in line with the criteria of SR VII. Given the special circumstances within
HS/VCS, which mean that the financial sector, to a large extent, consists of IOR and APSA, the
existence of these procedures is therefore of particular relevance to the overall picture.

629. Furthermore, in the internal procedure of IOR, there is a procedural difference between
domestic transfers and international transfers. The IOR explained that domestic transfers
concerned wire transfers with Italian banks executed through the Italian corporate banking files
transmission system (CBI). International transfers were concerned as 'foreign, being not Italian'
for which the SWIFT message 103 was used. IOR states that currently all IOR wire transfers
concern international transfers. Also in the case of domestic transfers, the internal procedures in
place since 20 June 2011 require that transfers of funds must be accompanied by the following
information on the payer:

a) name and surname;

b) address (or substituted by date and place of birth);

c) relationship identification number.

630. In the context of the lack of provisions before November 14 th 2011, the fact that the guidance
is not in line with the standard regarding 'domestic transfers' and the remaining concerns
regarding their sanctionability, the internal procedures of the IOR are to be qualified as voluntary
behaviour from the private sector and not as "other enforceable means".

631. Effective implementation of those internal procedures is nevertheless important. An
international firm of accountants 75 has audited the Financial Statements of IOR and in that context
also looked at the internal control system, but not for the purpose of expressing an opinion on the
effectiveness of the internal control system regarding AML/CFT policies. Moreover, in particular,
it was noted by the auditors in their draft management letter that IOR started a project to comply
with the AML/CFT Law also taking into account international anti-money laundering rules and
best practices during 2010 focussing on CDD, data recording, STR Reporting and AML/CFT
governance. The auditors were informed by the IOR that the project was expected to be finalised
in December 2012. In conclusion the external auditors have not evaluated the effectiveness of the
AML/CFT procedures since 2010.

632. The Management Letter regarding 2010 was not published because the auditors had executed
an IT audit in October 2010 following a specific requirement coming from the Board of
Superintendence. The management agreed with the auditors to report on this matter in the

75 Auditor to the IOR at the time of the MONEYVAL on-site visits.

124

Management Letter for the year 2011, which is scheduled to be submitted to the Board of
Superintendence in July 201 1.

Effectiveness

633. In September 2010, an investigation was opened in Italy to determine whether one or more
violations of Italian money laundering regulations had occurred with respect to requests by the
IOR made to an Italian bank that the Italian bank in question perform two wire transfers. The
transfers, which were not completed, were reported to be in the amounts of €20 million to a bank
in Frankfurt and €3 million to another Italian Bank. The funds sought to be transferred were
provisionally frozen but such funds were subsequently released by the Italian Authorities. At the
time of the evaluation visits, the related judicial proceedings had not been concluded. One of the
presumed issues at stake is the question of whether information regarding the identification of the
clients and their beneficial owners accompanied the transfers or not.

634. Related to this issue, Italy's FIU was requested by Italian judicial authorities to acquire
information on the use of various bank accounts opened at IOR. Italy's FIU forwarded its requests
to FIA. The information that was received by the Italian authorities was, according to them, very
generic as to the identification of the beneficial owners on whose behalf the accounts were held.

635. In the context of the assessment of this Recommendation it is as yet unclear to the assessors if,
in these particular cases, the ordering financial institution (IOR) included full originator
information in the message or payment form accompanying the wire transfer. The assessment
team could not pursue this matter in further detail as this evaluation is an assessment of the
effectiveness of the implementation of international standards and not an investigation.

636. On 23 May 2011 IOR issued a letter to its customers stating that it would no longer be
possible to use the cheques in their possession issued in respect of funds maintained at the IOR.
The letter stated that an Italian bank wanted to honour payment of the cheques only upon receipt
of all personal and fiscal data of the drawer and, where appropriate, the entity or congregation
with which the drawer was affiliated. The IOR explained that it would defend the autonomy and
privacy of its clients against any interference on the part of institutions and organisations outside
the Holy See. IOR officials explained to the assessment team that they were willing, and in
practice provided, all the required information on the basis of international standards, but that this
particular demand of the Italian bank went far beyond the international requirements (by
requesting a full client list of the IOR as a condition of doing any further business with the
Institute). The FIA asked the IOR for further details on the issue. The IOR explained that all
requested information had been provided to the FIA.

637. As a consequence of the fact that cross-border transactions are frequently taking place in
HS/VCS and are qualified as high risk by the authorities, effective implementation of this
Recommendation is of particular importance.

638. The internal procedures of IOR are largely in line with the criteria of SR VII. On the issue of
'domestic transfers' (transfers to Italy) the internal procedures require more than the provisions of
the FIU guidance in this respect. Regarding the impact of using the Italian corporate banking files
transmission system (CBI) instead of SWIFT messages in the recent past (June 2011 - March
2012), the authorities explained that there is no practical difference between CBI and SWIFT
messages. Because of the recent implementation of the changes full effectiveness of the
implementation could not be assessed.

639. The disputed issues with the Italian prosecutors and the issue as described in the letter of 23
May 2011 raise concerns regarding the overall effectiveness. In the context of the assessment of
this Recommendation it is, as yet, unclear to the assessors if, in these particular cases, the ordering
financial institution (IOR) included full originator information in the message or payment form
accompanying the wire transfer. The assessment team could not pursue this matter in further
detail because, as noted, this is an assessment and not an investigation

125

640. The APSA had issued internal anti-money laundering procedures on 13 March 2012 more
than two months after the first MONEYVAL on-site visit). No specific written procedures are in
place regarding wire transfers. In practice the wire transfers executed by APSA are mainly related
to salary and pensions. APSA operates under SWIFT codes.

641. The FIA has not inspected IOR and APSA yet in its supervisory role. That is remarkable
knowing the issues at stake between IOR and foreign authorities and the small size of the financial
sector in VCS and does not give the impression that there are measures in place to effectively
monitor compliance.

Additional elements

642. So far the following statistics regarding cross border transactions were received:
Cross border transfers (from 01/04/201 1 to 1 1/10/201 1)

Currency

Total amount when entering

Number of entries

Total amount when leaving

Number of exits

Swiss franc

104,600,00

6

20,000,00

1

Singapore dollar

105,579,00

2

0,00

Euro

11,168,519,21

405

25,501,751,88

1,148

Yen

5,968,000,00

4

0,00

Pound

35,400,00

4

2,525,00

2

US dollar

1,438,559,00

71

5,797,402,03

194

Canadian dollar

70,297,00

4

36,400,00

3

Other

0,00

33,050,00

2

Total

496

1,350

currency

Total amount when
entering and leaving

Total entries
and exits

Total amount in

entering

(Euro)

Total amount in
leaving
(Euro)

Total amount in

entering and leaving

(Euro)

Swiss franc

124,600,00

7

85,442,51

16,337,00

101,779,51

Singapore dollar

105,579,00

2

59,683,81

0,00

59,683,81

Euro

36,670,271,09

1,553

11,168,519,21

25,501,751,88

36,670,271,09

Yen

5,968,000,00

4

55,502,40

0,00

55,502,40

Pound

37,925,00

6

40,072,80

2,858,30

42,931,10

US dollar

7,235,961,03

265

1,014,327,95

4,087,748,17

5,102,076,12

Canadian dollar

106,697,00

7

49,805,42

25,789,40

75,594,82

Other

33,050,00

2

total

1,846

12,473,354,10

29,634,484,75

42,107,838,86

126

3.5.2 Recommendation and comments

R.10

643. FIA should put in place appropriate arrangements to monitor and ensure effective
implementation of the record-keeping requirements (including adequate sample testing).

644. Effective implementation by APSA should be enhanced by the adoption of internal
procedures clearly specifying the duties and responsibilities of APSA staff. 76

SR.VII

645. It is recommended to establish a clearer basis for requirements regarding the obligations of
payment service providers in the law instead of in guidance, particularly as it is unclear what the
legal expectations are for financial institutions such as IOR.

646. It is recommended to establish an explicit requirement that ensures that non-routine
transactions are not batched where this would increase the risk of money laundering. It is also
recommended to establish for beneficiary financial institutions effective risk-based procedures for
identifying and handling wire transfers from beneficiary financial institutions which are not
accompanied by complete originator information.

647. So far there is no evidence of applied sanctions in practice. It is recommended to effectively
apply the powers of sanctions by the FIA, where appropriate.

648. The guidance in place is unclear when it comes to the verification obligation. Art. 5 obliges
the payment service provider of the payer to 'verify the completeness' of the informative data
before transferring the funds. Essential criterion 1 of SR.VII nevertheless requires that financial
institutions should verify the 'identity' of the originator. Verification of completeness, as noted
earlier, might be interpreted as ensuring that all the different types of information are available,
while the essential criteria requires ensuring that the identity is verified. It is recommended to
amend Art. 5 in this respect.

649. The standard under essential criterion 3 accepts that domestic transfers include only the
originator's account number or a unique identifier. Art. 6 of the Regulation chooses the same
approach for all transfers of funds involving States having equivalent legislative schemes under
the condition that the information on request can be made available within three working days.
While the European Union is qualified as domestic for the purposes of this Special
Recommendation, the HS/VCS is not part of the EU. The concept 'states with equivalent
legislative schemes' even broadens this approach 77 . For both reasons this means that the
Regulation is not in line with the requirement that for cross-border wire transfers of €1,000 or
more the ordering financial institution should be required to include full originator information in
the message or payment form accompanying the wire transfer.

650. Each intermediary and beneficiary financial institution is required to ensure that all originator
information is transmitted with the transfer. Art. 13 describes what to do when there are technical
limitations. While the standard refers to technical limitations for cross-border transfers, the
Regulation unfortunately chooses the same approach regarding states with 'no equivalent
legislation' . This should be reviewed.

76 The evaluation team has been informed that APSA has adopted internal procedures. The procedures provided
to the evaluation team were dated 13 March 2012.

77 Instruction No. 3 regulates the identification of states considered as having an equivalent regime. It consists of
the member states of the EU and EEA, Australia, Brazil, Canada, Japan, Hong Kong, India, Republic of Korea,
Mexico, Russian Federation, Singapore, USA, Republic of South Africa, Switzerland, Mayotte, New Caledonia,
French Polynesia, Saint-Pierre and Miquelon, Wallis and Futuna, Aruba, Curacao, Sint Maarten, Bonaire, Sint
Eustatius and Saba.

127

3.5.3

Compliance with Recommendation 10 and Special Recommendation VII

Rating

Summary of factors underlying rating

R.10

LC

Effectiveness

• The requirement to maintain records of the business correspondence
has been introduced too recently to be considered fully effective.

• The lack of on-site inspections (including sample testing) with respect
to the implementation of record keeping duties raises concerns.
Furthermore, APSA has no internal procedures in place with regard to
record-keeping obligations.

SR.VII

NC

• No explicit requirement in the Regulation that ensures that non-routine
transactions are not batched where this would increase the risk of
money laundering.

• No effective risk-based procedures have been required from beneficiary
financial institutions for identifying and handling wire transfers that are
not accompanied by complete originator information.

• The Regulation itself contains weaknesses regarding the verification of
identity and too broad an interpretation of the concept of 'domestic
transfers'.

• APSA had no written internal procedures in place at the time of the
MONEYVAL on-site visits.

• The FIA has not inspected IOR and APSA yet in its supervisory role.
This does not give the impression that there are measures in place to
effectively monitor the compliance.

• Overall the requirements have been introduced too recently to be
considered fully effective and the evaluators were unable to assess the
effectiveness of implementation.

Unusual and Suspicious Transactions

3.6 Monitoring of Transactions and Relationships (R.ll and 21)

3.6.1

Description and analysis

Recommendation 11

Special Attention to Complex, Unusual Large Transactions

651. The obliged subjects are required to be particularly attentive to complex transactions, of
notable import, or unusual for the counterpart, or otherwise difficult to connect to a legitimate
scope, as determined, inter alia, on the basis of FIA guidelines (Art. 34 §2 of the revised
AML/CFT Law). FIA Instruction No. 4 requires obliged subjects to pay attention inter alia to
operations lacking plausible economical or financial justification. In combination, the provisions

128

meet the elements of essential criterion 11.1 (i.e. complex, unusual large transactions, or unusual
patterns of transactions, that have no apparent or visible economic or lawful purpose).

652. It is noted that, prior to the amendments and additions to the original AML/CFT Law
promulgated by Decree N. CLIX there was no such requirement.

Examination of Complex & Unusual Transactions

653. The standard requires that obliged subjects should be required to examine as far as possible
the background and purpose of transactions mentioned in the previous paragraph and to set out
their findings in writing. There is no such requirement in the AML/CFT Law.

Record- Keeping of Findings of Examination

654. As a consequence of the fact that there is no requirement for examinations as described in the
previous paragraph, there is no specific requirement to keep the resulting findings available for
competent authorities and auditors for at least five years. The authorities refer to the general
requirement under Art. 33 §1 of the revised AML/CFT Law to preserve information and
documents obtained. However, this requirement does not cover findings of examinations carried
out by the obliged subject.

Recommendation 21

Special Attention to Countries not Sufficiently Applying FATF Recommendations; Examinations of
Transactions with no Apparent Economic or Visible Lawful Purpose from Countries Not Sufficiently
Applying FATF Recommendations

655. While FIA Instruction No. 2 (see Annex XXIII) mentions geographic risk as a risk factor that
has to be taken into account when applying a risk-based approach, there is no express requirement
for obliged subjects to pay special attention to business relationships and transactions with
persons (including legal persons and other financial institutions) from or in countries, which do
not or insufficiently apply the FATF Recommendations.

656. Furthermore, there are no effective measures in place to ensure that financial institutions are
advised of concerns about weaknesses in the AML/CFT systems of other countries. The
authorities state that such information will be disseminated in the future based on the new
empowerment according to Art. 2 septies §3 g) of the revised AML/CFT Law. However, this
empowerment refers to the dissemination of updated intelligence on ML and FT activities, rather
than information about weaknesses of countries in applying FATF Recommendations.

657. In addition, there are no requirements to examine the background and purpose of those
transactions that have no apparent economic or visible lawful purpose, as far as possible and to
have respective written findings which shall assist competent authorities (e.g. supervisors, law
enforcement agencies and the FIU) and auditors.

Ability to Apply Counter Measures with Regard to Countries Not Sufficiently Applying FATF
Recommendations

658. There is no empowerment to apply appropriate counter-measures where a country continues
not to apply or insufficiently applies the FATF Recommendations.

Effectiveness and efficiency

659. The IOR relies on an IT solution (Discovery Day) for monitoring the unusual operations of a
customer. This IT tool is designed to scan the IOR transaction data warehouse (archivio unico
informatico; mentioned under Recommendation 10 for the following unusual customer
transactions:

1) significant transactions by description and risk categories;

2) significant cash transactions by description and risk categories;

3) wire transfers with a correspondent bank located in a risky country;

129

4) beneficial owner or their representative residing in a risky country;

5) transactions executed by encharged persons 78 .

660. However, the system was not fully implemented, at the time of the MONEYVAL on-site
visits, given that the risk categorisation has not been finalised yet (as mentioned under
Recommendation 5). Furthermore, it has not been determined which transactions are considered
to be significant or which countries are regarded as risky 79 .

661. The evaluation team concludes, that neither the IOR nor APS A have implemented adequate
procedures which ensure that special attention is paid to relationships and transactions as
described under Recommendations 11 and 21 and which provide that their background and
purpose is examined and recorded as far as is required under Recommendations 11 and 21.

662. So far, obliged subjects have never been informed by the competent authorities about
weaknesses in the AML/CFT systems of other countries.

3.6.2

Recommendations and comments

663. Given the global spread of the IOR's customers and its activities, the above-mentioned gaps
under Recommendation 21 present important deficiencies.

664. HS/VCS should introduce a requirement in law, regulation or "other enforceable means" to
examine as far as possible the background and purpose of complex, unusual large transactions, or
unusual patterns of transactions, that have no apparent or visible economic or lawful purpose and
to set out their findings in writing.

665. HS/VCS should introduce a requirement in law, regulation or "other enforceable means" to
keep such findings available for competent authorities and auditors for at least five years.

666. HS/VCS should introduce a requirement to give special attention to business relationships and
transactions with persons from or in countries which do not or insufficiently apply the FATF
Recommendations.

667. HS/VCS should introduce a requirement to examine transactions, the background and purpose
of such transactions as far as possible, and to keep written findings available, if they have no
apparent economic or visible lawful purpose.

668. HS/VCS should put in place effective measures to ensure that obliged subjects are advised of
concerns about weaknesses in the AML/CFT systems of other countries.

669. HS/VCS should introduce a clear empowerment to apply appropriate counter-measures where
countries continue not to apply or insufficiently apply the FATF Recommendations.

3.6.3

Compliance with Recommendations 11 and 21

Rating

Summary of factors underlying rating

R.11

PC

• No requirement to examine as far as possible the background
and purpose of complex, unusual large transactions, or
unusual patterns of transactions, that have no apparent or
visible economic or lawful purpose and to set forth their
findings in writing.

78 ,

79

'Encharged persons" are persons entitled to execute a single ad hoc transaction, without a general proxy.
After the MONEYVAL on-site visits, the IOR representatives informed the evaluation team that the system

has become operational as far as wire transfers are concerned.

130

• No express requirement to keep such findings available for
competent authorities and auditors for at least five years.

Effectiveness

• The requirement to pay special attention to all complex,
unusual large transactions, or unusual patterns of
transactions, that have no apparent or visible economic or
lawful purpose had not been fully implemented at the time of
the MONEYVAL on-site visits.

R.21

NC

• No requirement to give special attention to business
relationships and transactions with persons from or in
countries which do not or insufficiently apply the FATF
Recommendations .

• No requirement to examine transactions, the background and
purpose of such transactions, as far as possible, and to keep
written findings available, if they have no apparent economic
or visible lawful purpose.

• No effective measures in place to ensure that obliged subjects
are advised of concerns about weaknesses in the AML/CFT
systems of other countries.

• There is no empowerment to apply appropriate counter-
measures where countries continue not to apply or
insufficiently apply the FATF Recommendations.

3.7 Suspicious Transaction Reports and Other Reporting (R. 13, 14, 19, 25 and

SR.IV)

3.7.1

Description and analysis

670. The HS/VCS has opted for a reporting system based on a subjective assessment of the relevant
financial institutions. The reporting obligation, as originally laid down in the Act CXXVII of 30
December 2011, has been effective since 1 April 2011. The revised AML/CFT Law basically
follows the same line.

Recommendation 13

671. Pursuant to Art. 34.1 of the revised AML/CFT Law, the entities performing on a professional
basis an activity listed in Art.2.1.a) of the same Law, together with the professionals set out in
Art. 2.1.b) and c), are under an obligation, on their own initiative, to inform the FIA of any
suspicious transaction, when they know, suspect or have reasons to suspect that the relevant funds
are the proceeds of criminal activities or when ML or FT has been or is being committed or has
been attempted 80 . As noted above, within the HS/VCS only the APSA and the IOR can be

The specific reference in the original Art. 34.2 and 35 to "self-laundering" was removed, as it rightfully was
considered redundant.

131

regarded as financial institutions falling under the reporting obligation. The revised AML/CFT
Law introduced a similar reporting obligation for public authorities (Art. 2 §2).

672. Art. 34.1 of the revised AML/CFT Law also applies when there is a suspicion or knowledge
"when the financing of terrorism has been committed". The international standards however
impose broader reporting obligations, i.e. (reasonable grounds to) a suspicion of the funds being
linked to or related to or to be used for terrorism, terrorist acts or by a terrorist organisation. These
suspicions should also trigger a STR, even when unrelated to any financing aspects. Furthermore,
there is a cascading effect from the reference to the offence of terrorism financing, as defined in
Art. 38 ter Criminal Code, which scope (as noted in part 2.2 above) gives rise to concerns.

673. Art. 34.1 further explains the basic reasons for suspicion by referring inter alia to the
financial, economical and professional profile of the operator and the characteristics of the
operation. The notion of "suspicion" is further specified in Regulation n° 5 of the FIA "governing
the content, modes of identification, also through indicators of anomaly and forwarding reports" 81
(see Annex XXI). This is supported by a series of indicators listed in FIA Instruction no. 4 "of
Indicators of Anomalies for the reporting of suspicious transactions" (see Annex XXIV). The
grounds for suspicion for the 2 STRs filed were taken from this objective list.

674. As in the old Law, whatever the circumstances or grounds prompting the disclosure, the
reporting obligation only arises from a suspect "transaction" being performed, and consequently it
is legally limited to an active financial transaction or similar activity. Such a restrictive approach
is not in line with the FATF essential criteria which only requires the existence of funds related to
criminal activity, not necessarily in the context of an active conduct. The provision is also
narrower than the EU Directive standard, which also imposes the reporting obligation in respect
of "facts", within the context of a financial transaction or not.

675. According to Art. 34.2 of the original AML/CFT Law, the FIA had to be informed
"promptly", whilst Art. 35.1 of the revised AML/CFT Law sets the rule of a priori reporting. In
the present Art. 34.1 the word "promptly" has been removed, which makes it more consistent with
Art. 34.3 and Art. 35, specifying that the disclosure has to be made as soon as the suspicion arises
and prohibiting the reporting entities from carrying out operations they consider suspect, unless
they have filed a SAR. This enables the FIA to intervene in a timely manner, if necessary with a
freezing action. Deviating from this rule is only allowed if it is impossible to abstain from
executing the transaction or if by doing so it would jeopardise an investigation. In those cases the
report must be filed immediately after execution (Art.35.2 revised AML/CFT Law).

676. Only suspicious operations relating to money laundering or terrorism financing should trigger
a SAR. Bearing in mind that the ML offence in the HS/VCS is not an all crimes offence, this
could be understood as requiring the reporting entities to disclose only in cases where they can
identify a relevant predicate offence and relieving them from the reporting obligation when they
find that the underlying offence is not included in the list.

677. Compared to Art. 34.2 of the original AML/CFT Law, the reference to attempted transactions
has been dropped. Instead Art. 34.1 of the revised Act now refers to the circumstance that "money

laundering or financing of terrorism or has been attempted". The attempt now relates to the

ML or TF as ground for the disclosure, not to the transaction itself, which is not entirely correct.
In any case, if it was the legislator's intention to include attempted transactions, it is highly
questionable that the reporting entities understand the present formulation in that sense.

678. Art. 34.3 §2 now specifically states that the amount involved makes no difference in terms of
the obligation to report.

679. As there is no tax system in the VCS, tax offences are not included in the list of predicate
offences. Consequently, the reporting entities are legally under no obligation to disclose if the

81 The FIA Regulations are considered to be other enforceable means as set out under SR.VII in Section 3.5
above.

132

proceeds are the result of a fiscal evasion. The fact that the case presents fiscal aspects does not
invalidate the reporting requirement (Art. 34.3 §2).

Additional Elements

680. The reporting duty also applies when the financial institutions suspect that the transaction
relates to funds that are the proceeds of whatever criminal activity that would constitute a
predicate offence for ML domestically.

Special Recommendation IV

681. As stated above, Art. 34.1 of the revised AML/CFT Law also expressly applies to the
financing of terrorism, so the related reporting obligation follows the same regime as the ML one.
The scope of the reporting obligation should, however, be broader (see consideration of 13.2
above).

682. As in the ML context, the reporting obligation does not depend on any threshold amount
involved in the suspect transaction. Possible fiscal aspects do not pre-empt any disclosure under
Art. 34.1 of the revised AML/CFT Law. As for the inclusion of attempted transactions, the same
comment as above for ML applies.

Safe Harbour Provisions (Recommendation 14)

Protection for Persons Making STRs)

683. Art. 34 §4 of the revised AML/CFT Law establishes that a report in good faith of a suspicious
transaction, including any information related to it, shall not give rise to any form of liability for
the subjects who make the report, or their legal representatives, administrators, directors,
employees, consultants, and collaborators on any grounds, nor it shall constitute a breach of
banking or professional secret, nor of any possible restrictions on the disclosure of information
imposed by legal, administrative or contractual provisions.

684. According to the authorities "good faith" also include cases where the reporting person did not
know precisely what the underlying criminal activity was, and regardless of whether illegal
activity actually occurred.

Tipping off (Recommendation 14)

Prohibition against Tipping-Off

685. Pursuant to Art. 26 of the revised AML/CFT Law the obliged subjects, their legal
representatives, administrators, directors, employees, consultants, and collaborators of whatever
nature, as well as anyone else who is aware of it, shall not disclose to the entitled person or to
third parties the report of suspicious transactions, including correlative information, nor that there
is in course, or could be in course an investigation regarding money laundering or the financing of
terrorism.

686. The tipping off prohibition only appears to cover STRs that have already been submitted, but
not the fact that a STR has been identified and is in the process of being prepared/reported.

Additional elements

Additional Element — Confidentiality of Reporting Staff

687. Art. 37 of the revised AML/CFT Law, concerning Protection measures, provides that the FIA
shall adopt, also on the basis of agreement protocols with the Judiciary Authority, both inquiring
and adjudicatory, and with any authority whatsoever, adequate measures to assure the maximum
confidentiality with regard to the identity of the subjects that report suspect operations.

133

The Memorandum of Understanding on the exchange of information within the cooperation
between Vatican authorities provides that in the event that FIA forwards a suspicious transaction
report to the Promoter of Justice, the identity of the reporter shall not be mentioned, unless this
element is required by a justified decree.

Recommendation 25 (feedback and guidance relating to STRs)

689. According to Art. 33 §5 of the of the revised AML/CFT Law, the FIA shall:

b) issue and periodically update indicators of anomalies in order to facilitate the identification
of suspect operations;

h) draw up statistics concerning the application and effectiveness of the administrative and
organisational measures of prevention and repression of money laundering and financing of
terrorism;

i) carry out studies in matters of prevention and countering of money laundering and financing
of terrorism and develop and disseminate models and format descriptive about unusual
behaviours on the economic and financial level, referable to possible activities of money
laundering or financing of terrorism.

690. In addition to the forgoing, Art. 36 §4 provides that upon the dismissal of a suspicious
transaction report, this fact shall be communicated to the reporting subject by the FIA.

691. The FIA issued on the 14 November 2011 Regulation No. 5 governing the means of
identification (also through anomaly indicators) and forwarding of reports of suspicious
transactions (see Annex XXI).

692. On the same date the FIA issued Instruction No. 4 on Indicators of Anomalies for the
Reporting of Suspicious Transactions (see Annex XXIV).

693. The revised AML/CFT Law gives the FIA the obligation in Art. 2 septies §3 e to issue
guidelines to facilitate the reporting of suspicious transactions and provides the subjects listed in
Art. 2 §1, with guidance regarding the manner of reporting, including the specification of
reporting forms and the procedures to be followed when reporting.

694. While the Regulations and Instructions all refer to and mention the old law as the basis for
their existence, the question arises if those are still valid. At the very least, effectiveness issues
arise as the guidance is harder to understand in certain cases.

695. One of the financial institutions complained that it had never received any further explanation
on the issued guidelines or feedback on the internal procedures that were sent to the FIA.

Recommendation 19

Consideration of Reporting of Currency Transactions above a Threshold

696. No evidence was provided that the authorities have considered the feasibility and utility of
implementing a system where financial institutions report all transactions in currency above a
fixed threshold to a national central agency with a computerised data base.

Additional elements

Additional Element — Computerised Database for Currency Transactions Above a Threshold and
Access by Competent Authorities

697 '. Not to be assessed, given that the reporting of currency transactions above a threshold has not
been implemented.

Additional Element — Proper Use of Reports of Currency Transactions Above a Threshold

698. Not to be assessed, given that the reporting of currency transactions above a threshold has not
been implemented.

134

Recommendation 32

699. The low number of STRs submitted to the FIA together with the novelty of the regime meant
that it was not possible to assess the effectiveness of the gathering of statistics. Nonetheless the
authorities were able to provide the limited information that they held.

Effectiveness and efficiency (R.13 & SR.IV)

700. By 18 March 2012 2 STRs had been filed under the AML/CFT regime by a financial
institution. This appears to be low as the SAR regime had been in effect since 1 April 2011. Even
if allowances are made for the small size of the financial sector in the HS/VCS and for the
reporting entities needing some time to accustom themselves to the new regime and acquiring
experience, effectiveness of the reporting system is questionable.

701. The SARs were founded on one of the indicators listed by the FIA in its Instruction n°4,
which may be an indication of future reporting conduct. Both financial institutions which the
evaluators met interpret the list as having a mandatory character that obliges them to report as
soon as one of the indicators applies. This in itself is not a formal deficiency, but by doing so the
institutions can, in effect, disregard their own responsibility to identify whether a transaction is
suspicious. Furthermore, the mere fact of an indicator being met should not be a decisive element
by itself, but should be underpinned by a subjective appreciation by the reporting entity of the
suspicious character.

702. As stated, the obligation to report is "transaction" based and, as such, is narrower than the
FATF essential criteria, which refers to the existence of funds with criminal origin. A restrictive
interpretation would exclude, for instance, the situation where the suspicion is not raised by or at
the occasion of a concrete transaction, but by outside information unrelated to any activity on an
account. Such a minimalistic approach would of course negatively impact on the overall
effectiveness. Furthermore, the lack of clarity about attempted transactions being included in the
reporting duty in the new AML/CFT is to be deplored.

703. Bearing in mind that the ML offence in the HS/VCS is not an all crimes offence, this could be
understood as requiring the reporting entities firstly to establish the predicate offence to determine
if the suspicious fact should trigger a disclosure and to disclose only in cases where they can
identify a relevant predicate offence. The FIA Regulations and Instructions do not touch upon this
issue, which could have a serious restraining effect on the performance of the reporting regime if
that interpretation would be upheld. As a general rule, the reporting entities should not be required
to go further than a prima facie assessment of the elements being related to money laundering or
terrorism financing activity, without going into a technical assessment of the offences.

704. Even if the effectiveness impact of the (primarily technical) deficiencies in relation to the
reporting obligation in the terrorism context is considered low, since it may be expected that any
suspected link to terrorism as such would trigger an STR, no doubt should be left on the scope of
this key rule in the fight against terrorism.

3.7.2 Recommendations and comments

Recommendation 13

705. The reporting regime is basically sound. Reporting activity in this starting phase is low and it
is hoped that the frequency will pick up in due time. In terms of effective asset recovery the rule
of a priori reporting is a very positive feature of the system. There are still some refinements to be
made in order to solidify the legal framework by doing away with the (potential) restrictions
which could unduly narrow down the reporting obligation.

135

706. Therefore it is recommended to:

• Amend the law to broaden the reporting scope beyond the strict terrorism financing to bring
it in line with the standards;

• Amend the reporting requirement to require that a report is submitted to the FIA when it is
suspected or there are reasonable grounds to suspect that "funds" (rather than "transactions")
are the proceeds of a criminal activity;

• formally broaden the reporting duty beyond suspect operations to include suspicions on funds
generally;

• remove any doubt about the reporting obligation including attempted transactions;

• remove any uncertainty as to the extent of the reporting obligation of the financial institutions
in respect of the identification of the predicate offence; and

• emphasise the priority rule of the subjective assessment of the suspicious nature of the funds,
where the objective indicators should only be seen as a guidance and support.

Special Recommendation IV

707. The same comments apply as for R.13 above.
Recommendation 14

708. HS/VCS authorities should extend the tipping off prohibition to the fact that a STR has been
identified and is in the process of being prepared/reported.

Recommendation 19

709. Particularly in the light of the large amounts of cash transactions and wire transfers carried out
by the IOR, HS/VCS should consider the feasibility and utility of implementing a system where
obliged subjects report all transactions in currency above a fixed threshold to a national central
agency with a computerised data base.

Recommendation 25

710. Update all existing guidance in accordance with the new law as they currently all refer to the
old law and to articles that no longer exist or have been changed considerably.

711. Provide an active explanation of the issued Regulations and Instructions to the financial sector
and feedback on the internal procedures sent to the FIA by financial institutions.

3.7.3

Compliance with Recommendations 13, 14, 19, 25 and Special Recommendation SR.IV

Rating

Summary of factors underlying rating

R.13

PC

• Attempted transactions not explicitly covered in the reporting
obligation.

• Reporting obligation is limited to "transactions" rather than "funds"

• No reporting obligation covering funds suspected to be linked or
related to, or to be used for terrorism, terrorist acts or by terrorist
organisations.

• Deficiencies in the terrorist financing offence formally limit the

136

reporting obligation in respect of those who finance terrorism.
• Effectiveness concerns.

R.14

LC

• There is no provision that restricts disclosure of the fact that a
suspicious transaction has been identified and that an STR is in the
process of being prepared/reported.

R.19

NC

• HS/VCS has not considered the feasibility and utility of implementing
a system where obliged subjects report all transactions in currency
above a fixed threshold to a national central agency with a
computerised data base.

R.25

PC

• While the Regulations and Instructions all refer to and mention the old
law as the basis for their existence, the question arises if those are still
valid.

• Effectiveness issues arise as the guidance is harder to understand in
certain cases as several articles have been changed considerably.
Overall the requirements have been introduced or clarified too
recently to be considered fully effective.

• Failure to provide further requested explanations on the issued
guidelines or feedback on the internal procedures that were sent to the
FIA.

SR.IV

PC

• Attempted transactions not explicitly covered in the reporting
obligation.

• No reporting obligation covering funds suspected to be linked or
related to, or to be used for terrorism, terrorist acts or by terrorist
organisations.

• Deficiencies in the terrorist financing offence formally limit the
reporting obligation in respect of those who finance terrorism.

• Effectiveness concerns.

Internal controls and other measures

3.8 Internal Controls, Compliance, Audit and Foreign Branches (R.15 and 22)

3.8.1

Description and analysis

Recommendation 15

Generally

712. Art. 2 of the original AML/CFT Law provided, in line with criterion 1 of the essential criteria,
that:

Any subject, natural or legal person, body corporate or entity of any nature, including
subsidiaries and branch offices of foreign subjects performing, on a professional basis, one
of the activities indicated in Art. 2 §1 a, are obliged to observe the rules governing the

137

customer due diligence, registration of relationships and operations, keeping of the
relevant information and reporting of suspect operations; to this end they have to provide
for adequate organisational arrangements and procedures, as well as to assure an
adequate training of the personnel.

713. The subjects referred to in the preceding paragraph shall adopt any provision necessary to
assure the accurate and immediate fulfilment of the foreseen duties.

714. The new law stipulates in Art. 2 ter that:

1. The subjects referred to in paragraph 2, subparagraph 1, shall adopt adequate policies,
organisation, measures and procedures to prevent and counter money laundering and the
financing of terrorism, on the basis of the development of new technologies and of the
phenomena of money laundering and the financing of terrorism.

2. The subjects referred to in article 2, paragraph 1, shall select those who exercise
managerial functions, direction or control, among persons of suitable competence and
professionalism.

3. The subjects referred to in article 2, paragraph 1, shall adopt policies, programs and
measures to ensure that their employees, consultants, and collaborators on any grounds,
possess an adequate professional level to permit the proper and effective observance of the
requirements set forth in this law.

715. It further clarifies that these measures shall include training programs and continuous
formation (training) on the prevention of money laundering and the financing of terrorism.

716. The original AML/CFT Law did not provide for an explicit requirement to develop
appropriate compliance management arrangements or, at a minimum, the designation of an
AML/CFT compliance officer at the management level. The new law does not change this.

717. Furthermore, the original AML/CFT Law did not provide for timely access by the AML/CFT
compliance officer to customer identification data and other CDD information, transaction
records, and other relevant information. The new law does not change this.

718. The original AML/CFT Law did not provide for a requirement to maintain an adequately
resourced and independent audit function to test compliance with these procedures, policies and
controls. The new law does not change this.

719. Art. 2 does provide for a requirement for adequate training. In addition Art. 33 §5 g) of the
original AML/CFT Law established that the FIA prepares, after hearing the obliged subjects,
programmes of training of the personnel to make them aware of the law in force and the activities
that could be connected with money laundering or financing of terrorism. This is broadly
replicated in the revised AML/CFT Law.

720. The only element which is missing in comparison with the essential criteria is the explicit
requirement for an ongoing training of employees. The revised AML/CFT Law does not change
this.

721. The AML/CFT Law does not provide a requirement for screening procedures to ensure high
standards when hiring employees. The revised AML/CFT Law adds here in Art 2 ter, §2 that
managers should be selected among persons of suitable competence and professionalism. In §3 it
broadens this to their employees in general. In addition there are criteria in place in the HC/VCS
for the recruitment of personnel as disclosed in the General Regulations of the Roman Curia, Title
II, Art. 13 and 14, although it should be noted that there are no internal sanctions stipulated in the
General Regulations.

722. Those by-laws stipulate that office managers and all the officers of level 10 are appointed by a
bill of the Cardinal Secretary of State, upon proposal of the Head of Dicasteries. The other
officers are hired by the Head of Dicastery within the limits of organic table, after hearing the
opinions of the Secretary, Under-Secretary, Office manager or other officer acting in his place.
Hiring requires the permission of the Secretariat of State after it has heard the advice of the

138

Administration of the Patrimony of the Apostolic See. In addition it stipulates that the qualification
of candidates must be assessed on the grounds of appropriate titles of competence and possible tests
and that officials are selected from among those distinguished for virtue, prudence, knowledge and
due experience.

723. FIA Instruction No 1 in matters of organisation, procedures and internal controls preventing
(see Annex XXII) came into force on 14 November 2011. The FIA has the power to issue
guidelines on the basis of Art. 33, §5 a) of the original AML/CFT Law and Art. 2 septies §2 c) of
the revised AML/CFT Law.

724. The instruction defines the necessity of the ongoing character of the training of employees. It
also describes in depth the need for an audit function.

725. The instruction further states that the entities subject to this law shall be provided with a
function specifically devoted to preventing and countering operations of money laundering and
financing of terrorism, by appointing a person responsible for coordination and supervision, and
possessing suitable requirements of independence, authoritativeness and professional skills. This
seems to be very close to the requirement of the standard to designate an AML compliance officer
at the management level. Yet, it is does not provide for an explicit requirement for a timely
access.

726. The Instruction can be qualified as 'other enforceable means' as discussed earlier.

727. The conditions for 'other enforceable means' are broadly that the used language in the
document should be of a mandatory nature, that the document is issued by a competent authority
and that there are sanctions for non-compliance which should be effective, proportionate and
dissuasive.

728. To assess this last condition consideration should be given to the range of sanctions available
for legal and natural persons, the applicability in the case of breach of an AML/CFT requirement,
availability of evidence that sanctions have been applied in practice and the possibility for an
appeal if sanctions are applied.

729. In the context of the VCS it is mainly the sanctionability that is not fully satisfactory. Art. 42
of the AML/CFT Law (old and new) gives the FIU the power to apply sanctions for certain
specified Articles.

730. Art. 33 of the original AML/CFT Law, the basis on which the FIA can issue guidelines like
the instruction above, is not included in Art. 42 (old). This means that there is no legal ground for
the FIA to apply the available administrative sanctions if there is no compliance with the
Instruction.

731. In the new law the FIA has the obligation to issue guidelines and implementation norms in
Art. 2 septies, letter 2c. This obligation to issue guidelines is further restricted to:

i. the requirement set forth by Art. 2 ter regarding the adoption of policies, organisational

instruments, measures and procedures;

ii. the requirements set forth in Chapters V, VI and VII regarding the adequate verification,

registration, preservation of records, and the reporting of suspicious transactions;

iii. the transfer of funds.

732. Letter i seems to restrict the right for issuing guidelines to Art. 2 ter, §1 only while it
stipulates: 'regarding the adoption of policies, organisational instruments, measures and
procedures'. As far as the guidance of the FIA of 14 th November 2011 addresses those activities,
the FIA has the right to apply the available pecuniary administrative sanctions for natural and
legal persons on the basis of the new Art. 42.

733. This new Art. 42 (in combination with Art. 2 septies, §6) gives the FIU the right to impose
pecuniary administrative sanctions in case of violation of certain specified articles and also for

139

'related duties established by the regulations and implementation norms adopted pursuant to this
law'. This new Art. 42 does not refer to Art. 2 septies but it explicitly refers to Art. 2 ter.

734. As far as the FIA has the right to apply pecuniary administrative sanctions there are the
concerns as mentioned under SR VII and R 17. Although the new law is a substantial
improvement by adding sanctionability for legal persons, it still raises concerns regarding the
effective, proportionate and dissuasive criminal, civil or administrative sanctions for the following
reasons:

a) as APSA is regarded as a public authority the newly introduced administrative
sanctions appear not to apply to APSA

b) the existence of additional disciplinary sanctions for natural and legal persons is not
explicitly clear and not shown in practice;

c) explicit sanctions are not available for directors and senior management; and

d) no sanctions have been applied so far.

735. Although the condition of sufficient effective, proportionate and dissuasive criminal, civil or
administrative sanctions are not fully met, the evaluators consider that there are sufficient grounds
for considering the guidance as issued by the FIU as 'other enforceable means'. In practice the
Regulations and Instructions are accepted by the relevant institutions as being binding and
carrying sanctions that would be applied, particularly within the unique constitution and
institutional framework of the HS/VCS. This means that the provisions in the guidance can be
taken into account for rating purpose

IOR

736. Since June 2011 the IOR has had internal procedures in place that are in line with the
requirements of the essential criteria. APSA has had procedures in place since 2 January 2012

737. The effective implementation and effectiveness of internal procedures of financial institutions
is normally assessed by reviewing this against the legal obligations and supervisory guidance of
the FIA, the scope and consistency of supervisory programme, discussions with financial
institutions and the nature of enforcement actions. Unfortunately the FIA had no supervisory
programme in place at the time of the MONEYVAL on-site visits and had not inspected IOR or
APSA or imposed any sanctions. Discussions with the financial institutions nevertheless gave a
positive impression.

Other financial institutions (insurance, exchange bureaus and brokerage companies, credit
unions, postal organisations,.)

738. As previously stated, IOR and APSA are the only financial institutions operating in HS/VCS.
These is a post office but its activities are limited to sale of stamps.

Additional elements

739. IOR explained to the evaluators that the AML/CFT compliance officers are able to act
independently and to report to senior management above the compliance officers next reporting
level, including to the board of directors

Recommendation 22

Application of AML/CFT Measures to Foreign Branches and Subsidiaries

740. HS/VCS stated that there are no foreign branches or subsidiaries. However, the establishment
of branches or subsidiaries is not prohibited.

741. Prior to the amendments and additions to the original AML/CFT Law promulgated by Decree
N. CLIX there were no requirements with respect to foreign branches and subsidiaries of obliged
subjects at all.

140

742. In accordance with Art. 2 bis of the revised AML/CFT Law, the foreign branches and
subsidiaries of the obliged subjects, as well as the institutions controlled exclusively or jointly,
directly or indirectly, by them, are required to observe the requirements set out in the AML/CFT
Law.

743. There is still no requirement to pay particular attention that this obligation is observed with
respect to branches and subsidiaries in countries, which do not or insufficiently apply the FATF
Recommendations.

744. When the requirements in force in the foreign State are not equivalent with those set out in the
AML/CFT Law, the branches, subsidiaries or controlled institutions shall observe the
requirements set out in the AML/CFT Law, to the extent that the laws of the foreign State permit

so.

Requirement to Inform Home Country Supervisor if Foreign Branches and Subsidiaries are Unable to
Implement AML/CFT Measures

745. When the requirements in force in the foreign State are not equivalent with those set out by
this law; the branches, subsidiaries or controlled institutions shall inform the Financial
Intelligence Authority.

746. This requirement is not fully in line with the essential criterion, which requires informing the
home country supervisor when a foreign branch or subsidiary is unable to observe appropriate
AML/CFT measures because this is prohibited by local (i.e. host country) laws, regulations or
other measures.

747. However, the evaluators take the view that due to the above-mentioned reporting requirement
contained in the AML/CFT Law obliged subjects would also have to report instances where the
foreign branch or subsidiary is unable to observe appropriate AML/CFT measures because it is
prohibited by the host country's laws, regulations or other measures (as required by essential
criterion 22.2).

Additional elements

Additional Element — Consistency of CDD Measures at Group Level

748. There is no requirement for financial institutions subject to the Basel Core Principles for
Banking Supervision (Core Principles) (the IOR and APSA qualify as such) to apply consistent
CDD measures at the group level, taking into account the activity of the customer with the various
branches and majority owned subsidiaries worldwide.

Effectiveness and efficiency

749. Neither the IOR nor the APSA has foreign branches or subsidiaries. The above-mentioned
obligations are therefore not relevant in practice.

3.8.2 Recommendation and comments

Recommendation 15

750. Steps should be taken to ensure that all elements of guidance given by the FIU are
sanctionable or ensure that relevant criteria are incorporated in the AML Law.

75 1 . An explicit requirement for timely access to information for the compliance officer, either in
law or guidance should be introduced.

Recommendation 22

752. HS/VCS authorities should introduce a requirement to pay particular attention that branches
and subsidiaries in countries, which do not or insufficiently apply the FATF Recommendations,

141

observe AML/CFT measures consistent with the home country requirements and the FATF
Recommendations.

753. HS/VCS authorities should consider introducing a requirement for financial institutions
subject to the Core Principles (the IOR qualifies as such) to apply consistent CDD measures at the
group level, taking into account the activity of the customer with the various branches and
majority owned subsidiaries worldwide.

3.8.3

Compliance with Recommendations 15 and 22

Rating

Summary of factors underlying rating

R.15

PC

• The right of the FIA to issue guidance is restricted.

• Neither the law nor guidance provide for timely access by the
AML/CFT compliance officer to customer identification data and other
CDD information, transaction records, and other relevant information.

• IOR has internal procedures but their effectiveness could only partly be
assessed (Effectiveness issue).

• Overall the requirements have been introduced or clarified too recently
to be considered fully effective.

R.22

LC

• No requirement to pay particular attention concerning whether the
AML/CFT measures are consistent with the home country requirements
and the FATF Recommendations are observed with respect to branches
and subsidiaries in countries, which do not or insufficiently apply the
FATF Recommendations.

3.9 Shell Banks (R.18)

3.9.1 Description and analysis

Prohibition of Establishment of Shell Banks

754. Shell banks are defined in the revised AML/CFT Law as "a bank, or a credit institution that
conducts similar activities, that has been incorporated in a State where it has no physical presence
which enables it to be directed and managed effectively and which is not affiliated to regulated
financial services group".

755. As set out in section 1.3 above, it must be noted that pursuant to Art. 7. of Act No. V on the
Economic, Commercial and Professional Order of 1929, nobody is entitled to open shops,
businesses or workshops, even for the exercise of simple trades, nor set up industrial or
commercial enterprises of any kind, nor open offices, studios, agencies or fixed places of delivery
for the exercise of any profession, without obtaining authorisation from the Governor. (See also
section 5.1 of this report). Due to this public monopoly regime the establishment of shell banks
would not be possible.

Prohibition of Correspondent Banking with Shell Banks

756. Pursuant to Art. 1 bis b) of the revised AML/CFT Law it is prohibited to open or hold
correspondent current accounts in a shell bank, or to open or hold correspondent current accounts
in a bank or in a financial or credit institution that is known to permit a shell bank to use its own
accounts.

142

Requirement to Satisfy Respondent Financial Institutions Prohibition of Use of Accounts by Shell
Banks

151 . There is no express requirement for financial institutions to satisfy themselves that respondent
financial institutions in a foreign country do not permit their accounts to be used by shell banks.

3.9.2 Recommendations and comments

758. The authorities should introduce an express requirement for financial institutions to satisfy
themselves that respondent financial institutions in a foreign country do not permit their accounts
to be used by shell banks.

3.9.3 Compliance with Recommendation 1 8

Rating

Summary of factors underlying rating

R.18

LC

• There is no express requirement for financial institutions to
satisfy themselves that respondent financial institutions in a
foreign country do not permit their accounts to be used by shell
banks.

Regulation, supervision, guidance, monitoring and sanctions

3.10 The Supervisory and Oversight System - Competent Authorities and SROs /
Role, Functions, Duties and Powers (Including Sanctions) (R. 23, 29, 17 and 25)

3.10.1 Description and analysis

Authorities/SROs roles and duties & Structure and resources
Recommendation 23 (23.1, 23.2)

759. Art. 33 §1 of the original AML/CFT Law establishes that the FIA exerts its functions in full
autonomy and independence. It is assigned sufficient financial means and resources to assure the
effective pursuit of its institutional goals.

760. The provisions of Art. 33 §2 of the original AML/CFT Law state that the FIA has the power to
perform inspections of the subjects referred to in Art. 2 and to impose administrative pecuniary
sanctions on the responsible subjects, in the cases foreseen in this Act. The foregoing, therefore,
automatically makes financial institutions subject to regulation and supervision.

761. Art. 2 ter of the revised AML/CFT Law sets out the powers and responsibilities of the FIA as
supervisor and provides that:

1. The subjects referred to in §2.1 shall adopt adequate policies, organisation, measures and
procedures to prevent and counter money laundering and the financing of terrorism, on the
basis of the development of new technologies and of the phenomena of money laundering
and the financing of terrorism.

2. The subjects referred to in Art. 2, §1, shall select those who exercise managerial functions,
direction or control, among persons of suitable competence and professionalism.

3. The subjects referred to in Art. 2, §1, shall adopt policies, programs and measures to
ensure that their employees, consultants, and collaborators on any grounds, possess an

143

adequate professional level to permit the proper and effective observance of the
requirements set forth in this law.

762. These measures shall include training programs and continuous training on the prevention of
money laundering and the financing of terrorism.

763. The indicated activities as mentioned above are described in Art. 2 §1 and consist of receiving
deposits, insurance business, acquiring participations, collecting deposits, performing lending
business and payment services, issuing means of payment or guarantees, renting safe deposit boxes,
performing currency change operations, purchasing and selling land/property, managing monies and
financial instruments, opening or managing bank accounts and deposits, establishing or managing
trusts, performing investment services, performing the professions of auditor, external accountant or
tax adviser, notary or lawyer, real estate agents, when they engage in a transaction for buying or
selling real state and dealers in precious metals or stones, when they engage in a transaction equal
to or above €15,000 or more.

764. Finally, as established by the letter c) of the Apostolic Letter inform of a Motu Proprio on the
prevention and countering of illegal activities in the financial sector of December 30, 2010, the
FIA exercises its duties with respect to the Dicasteries of the Roman Curia and of all the entities
and institutions.

765. While countries should also ensure that financial institutions adequately comply with the
requirements, Art. 33 of the original AML/CFT Law stipulates that the FIA supervises the
observance of the duties established in matters of prevention and countering of money laundering
and financing of terrorism and issues provisions for the implementation of the rules contained in
this Act; furthermore, it has the power to issue guidelines and particular directives with reference
to the subjects on which the duties foreseen in this Act are imposed.

766. Moreover, Art. 33, §5 h) of the original AML/CFT Law establishes that the FIA draws up
statistics concerning the application and effectiveness of the administrative and organisational
measures of prevention and repression of money laundering and financing of terrorism. Art 2
septies §4 of the revised AML/CFT Law instead states:

The Financial Intelligence Authority, using, inter alia, the information gathered while
fulfilling its tasks as set forth in paragraph 3, shall:

a) prepare analysis and studies on particular sectors or instances of the economic and
financial activity that are deemed to be under risk, and even on single anomalies
that can be traced back to incidents of money laundering or financing of terrorism;

b) release to the public periodic reports containing non-confidential statistics and
information related to the exercise of its own activity.

767. So far the FIA has issued several examples of guidance, but has not drawn up statistics
concerning the application and effectiveness of the measures taken.

768. The FIA is in the process of assessing which bodies in HS/VCS meet the requirements of Art.
2; both IOR and APSA fall under its remit. At the time of the MONEYVAL on-site visits, no
inspections had been undertaken by the FIA.

769. The revised AML/CFT Law states, in Art. 2 septies, §2: "Regarding the supervision of the
subjects listed in Art. 2, §1, the FIA shall:

a) Monitor their compliance of the requirements set forth in this law to prevent and counter

money laundering and terrorist financing;

b) Verify, including through inspections, the suitability and effectiveness of the policies,

organisational instruments, measures and procedures adopted by them pursuant to Art. 2
ter, to prevent and counter money laundering and terrorist financing;

The inspections shall be governed by a regulation issued by the Pontifical Commission of the
Vatican City State."

144

770. This new article limits supervision to monitoring and verification of certain activities, such as
those set out under Art. 2 ter of the revised AML/CFT Law which focus mainly on internal
control measures and selection of employees. Verification is defined as including inspections and
is therefore broader than the term inspection. It is not clear though if it includes on-site
inspections.

771. Art. 33 of the original AML/CFT Law also directly mentioned the power to impose sanctions
on the responsible subjects. This power has been removed in the revised AML/CFT Law. In this
case we therefore have to fall back to the general provision in Art. 42 of the revised AML/CFT
Law which covers administrative sanctions. Art. 42 does not refer to the violation of Art. 2
septies, but refers to the related duties established by the regulations and other enforceable
measures adopted pursuant to the law.

772. In conclusion, the original definition appeared to be clearer and broader than the current one.
Furthermore, the new article stipulates that inspections shall be governed by a regulation issued
by the Pontifical Commission. It depends on the content of this Regulation to judge if the new
situation in the end is better or worse. There was no Regulation available for the assessment team
within the timeframes in which information has to be assessed.

773. The revisions of the law in this area could also raise an issue of independence. On this issue
Art. 2 septies gives the FIA operational independence and autonomy. While no inspections have
been executed it is still unclear what operational independence means in relation to the Regulation
referred to. This is of particular importance as the original AML/CFT Law pointed to 'full
independence' .

Recommendation 30 (Resources supervisors)

774. This part of Recommendation 30 assesses the structure, staff, resources and funding of
supervisors. In the case of HS/VCS the FIA is the relevant supervisor for AML/CFT purposes. While
the FIA also has a role as Financial Intelligence Unit for receiving, analysing and disseminating
STRs, this part of the report does not focus on the resources for that task, focussing instead on the
supervisory role.

775. The FIA has the power to conclude a Protocol of Entente with supervised subjects which also
refers to the content of the activity of inspection. This power gives rise to a concern considering
that supervisory activity has not yet been commenced. It will be necessary for the new Regulation
to give effect to the Protocol of Entente.

116. Art. 33 §1 of the original AML/CFT Law provided that the FIA exerts its functions in full
autonomy and independence. It is assigned sufficient financial means and resources to assure the
effective pursuit of its institutional goals.

777. In the revised AML/CFT Law, Art. 2 septies stipulates, as previously described, that the FIA
"shall perform its functions as set forth in this law with operational independence and autonomy
and, in the application of those principles, it shall have adequate resources".

778. The structure of the FIA does not, however, reflect a division between the FIA as Supervisor
or the FIA as FIU.

779. The Statute of the FIA (see Annex VI) governs its organisation and reflects the important
articles of the old law including under Art. 2 that is has full independence. The organs of the FIA
are the President and the Board of Directors. The President is appointed by the Supreme Pontiff
for a period of 5 years and chairs the Board of Directors meeting. The other members of the
Board of Directors are also appointed by the Supreme Pontiff. The Board is responsible for the
organisation and functioning of the FIA, including its strategy.

780. The Director of the FIA is appointed by the President. The Director is responsible for the
operational activity of the Authority and coordinates the activities of the personnel. The FIA
forwards a report to the Secretary of State on its activities.

145

781. As described previously, the revised AML/CFT Law gives operational independence to the
FIA instead of full independence and creates a different definition of supervision and inspection
based on a Regulation that still has to come into effect. This raises concerns as to the power of the
Board to define its strategy in supervisory issues and the status of the Statute of the FIA.

782. At the time of the MONEYVAL on-site visits, the FIA had a staff of 8 including the director and
deputy director. There is no real division regarding FIA as supervisor or FIA as FIU; although, two of
the 8 employees have backgrounds as supervisors.

783. The FIA has facilities and computers available. The budget was €600,000 for 2011 and has been
raised to €900,000 for 2012.

784. Staff of the FIA should be required to maintain high professional standards, including standards
concerning confidentiality, high integrity and should be appropriate skilled.

785. According to Art. 4 of the Statute of the FIA, the President of the FIA is appointed by the
Supreme Pontiff. Art. 5 of the Statute requires that the Board of Directors is chaired by the
President of the Authority and is made up of four more members, appointed by the Supreme
Pontiff among persons of great reliability, competence and professional skills. Art. 6 of the
Statute requires that the director of the FIA must be adequately qualified and haven proven
competence and professional skills in the legal-financial and computer-science fields, acquired in
the Authority's institutional matters and is appointed by the President with the permission of the
Secretary of State. The personnel of the Authority are required by Art. 6.3 to have an adequate
professional experience in the Authority's institutional matters and are hired by the President of
the Authority with the permission of the Secretary of State.

786. Art. 7 obliges all relevant officials to keep the highest secrecy about anything concerning the
FIA and its relationships with third parties.

787. In this regard, the provisions of Art. 13 §§1-2 (professional skills) and Art. 55 §2, p. 2
(provision of paid leave to take exams) of the General Regulation of the Roman Curia apply. As
the latter governs the matter of permits for the attendance of the examinations for relevant jobs, a
concession is imposed concerning staff training.

788. In accordance with the requirements of R.30.3, the staff of the FIA, as supervisor, should be
provided with adequate and relevant training.

789. Employees have followed training in IT and different conferences and seminars. No specific
training was provided for the supervisory side of the FIA.

Authorities powers and sanctions

Recommendation 29

790. The Recommendation requires that supervisors should have adequate powers to monitor and
ensure compliance by financial institutions. According to Art. 33 of the revised AML/CFT Law,
paragraph. 5, letter a), the FIA supervises the observance of the duties established in matters of
prevention and countering of money laundering and financing of terrorism and issues provisions
for the implementation of the rules contained in this Act, except for the criminal rules as
contained in Chapters II and III; furthermore, it has the power to issue guidelines and particular
directives with reference to the subjects on which the duties foreseen in this Act are imposed.

791. Supervisors should have the authority to conduct inspections of financial institutions,
including on-site inspections, to ensure compliance. Such inspections should include the review of
policies, procedures, books and records, and should extend to sample testing.

792. According to Art. 33 §2 of the original AML/CFT Law, the FIA has the power to perform
inspections at the subjects referred to in Art. 2 and to impose administrative pecuniary sanctions
on the responsible subjects, in the cases foreseen in this Act.

146

793. As set out under the consideration of R.23.1 and 23.2 above, Art. 2 septies, §2 of the revised
AML/CFT Law sets out the supervisory powers and responsibilities. As previous considered, this
new article limits supervision to monitoring and verification of certain activities, such as those
mentioned under Art. 2 ter, which focus mainly on internal control measures and selection of
employees. Verification is defined as including inspections and is therefore broader than the term
inspection. Nevertheless it is unclear whether it includes on-site inspections as required by the
Recommendation. Inspections then are governed by an external Regulation.

794. Art. 33 of the original AML/CFT Law directly mentioned the power to impose sanctions on
the responsible subjects. This power has been removed in the revised AML/CFT Law. In this case
we therefore have to fall back to the general provision in Art. 42 of the revised AML/CFT Law,
which covers administrative sanctions. Art. 42 does not refer to the violation of Art. 2 septies, but
refers to the related duties established by the regulations and other enforceable measures adopted
pursuant to the law.

795. In conclusion, the old definition seemed to be clearer and broader than the current one which
seems restricted to certain activities. The new article stipulates that inspections shall be governed
by a regulation issued by the Pontifical Commission. It depends on the content of this Regulation
to judge if the new situation in the end is better or worse. There was no Regulation available for
the assessment team within the timeframes in which information has to be assessed.

796. There is also the issue of independence. With regard to Art. 2 septies, this gives the FIA
operational independence and autonomy. While no inspections have been executed it is still
unclear what operational independence means in relation to the Regulation referred to. This is of
particular importance given that the old law pointed to 'full independence'. The authorities
explained that the new law is not intended to limit the supervisory powers or to limit the
independence of the supervisor; this will be further clarified in the Regulations that are still in the
process of being developed.

797. One of the members of the Cardinals Committee is also president of the FIA. This could raise
concerns regarding a serious conflict of interest. It is therefore strongly recommended that the
same person should not hold positions in the supervisory body and a supervised body.

798. Both under the original and revised AML/CFT Laws, it is unclear to what extent inspections
include the review of policies, procedures, books and records, and should extend to sample
testing. Under the new law this may be clarified in the Regulation to be issued by the Pontifical
Commission, although this was not available to the evaluators at the time of the MONEYVAL on-
site visits.

799. According to Art. 33, §2 of the original AML/CFT Law the FIA has access, also directly, to
financial, administrative, investigative and judicial information, required to perform its tasks in
countering money laundering and financing of terrorism. However, The revised AML/CFT Law
does not give the FIA such clear powers. Again the new Regulation has to give more clarity here.

800. Both under the original AML/CFT Law as the revised AML/CFT Law, it was and is unclear if
the legal empowerment of the supervisory authorities include the right of entry into the premises
of the institution under supervision, the right to demand books of accounts and other information,
the right to make and take copies of documents with a penalty on the institution if its officers fail
to comply.

801. Under the original AML/CFT Law both the IOR and the Supreme Court held the legal opinion
that (some of) those powers are not included. Under the revised AML/CFT Law the Regulation
could create clarity.

802. In the HS/VCS legal system, the supervisor's power to compel production of or to obtain
access for supervisory purposes is not predicated on the need to require a court order.

803. The Recommendation requires that the supervisor should have adequate powers of
enforcement and sanction against financial institutions, and their directors or senior management

147

for failure to comply with or properly implement requirements. As mentioned above Art. 33, §2
under the old law gives the right to access information and to impose sanctions. Art. 42 under the
new law gives the FIA the power to apply administrative pecuniary sanctions to natural and legal
persons. Both in the old and new Law there is no explicit empowerment to sanction directors or
senior management.

804. At the time of the MONEYVAL on-site visits, no sanctions had been applied against financial
institutions, directors or senior management.

805. So far the assessment team received the following statistics regarding supervision and
coordination:

supervision and coordination

Institution or obliged subject

Number of meetings

June to December

2011

Secretary of State

4

Governorate

3

Prefecture for the Economic Affairs of the Holy See

2

Gendarmerie Corps

3

Administration of the Patrimony of the Apostolic See (APSA)

5

Institute for Works of Religion (IOR)

5

Judiciary offices

2

Propaganda Fide

2

Cor Unum

2

Other (Congregation for the Oriental Churches, Pontifical Commission for
Sacred Archaeology and Equestrian Order of the Holy Sepulchre of
Jerusalem)

3

806. With regard to the figures for the IOR, it is good to note that what is called 'supervision' was later
explained to be supervision through correspondence between the FIA and IOR and consisted of the
following actions:

• At the end of the 30 days period from the entering in force of the Act CXXVII, the FIA
requested a formal communication, by 10 May 2011, regarding the issue of any provision for
the implementation of AML requirements; the answer was received within the deadline
established by the Law.

• On 12 May 2011, the FIA requested the agreements stipulated with foreign banks related to
the implementation of AML measures, and all the documentation connected to pending
inquiries before Italian (and other countries) Courts; a positive answer was given at the end of
May.

148

• On 8 June 2011, the FIA, in order to have an explanation of the background to the letter that
was sent to the customers of IOR on 23 May 2011, informed the IOR of the need for a
meeting (scheduled on 14 June) for the discussion of the issue.

• Further communications between June and September were aimed at going in depth into
details regarding the timing of applicability of the Law.

• Other requests were addressed to the IOR on the classification of customers, risk categories,
CDD on the existing customers, the monitoring of persons delegated to operate on the funds 82 .

Effectiveness and efficiency (R.23&29)

807. As stated above no inspections have been executed since the formation of the FIA at the
beginning of 2011. All communication was done via correspondence. IOR states that it had sent its
internal procedures to FIA for acceptance but never received a response.

808. Considering the issues at stake between IOR and foreign authorities and the small size of the
financial sector in VCS, it is remarkable that FIA did not conduct an on-site inspection within IOR to
investigate the issues in appropriate detail.

809. Since no on-site inspection has been executed, the effectiveness of the powers and authorities
could not be established.

Recommendation 17

810. Recommendation 17 requires that countries should ensure that effective, proportionate and
dissuasive criminal, civil or administrative sanctions are available to deal with natural or legal
persons covered.

811. Art. 42 of the revised AML/CFT Law provides that:

(a) In case of violation of the obligations set forth in Arts. 1 bis; 2 ter, 25 paragraphs 1, 2, 4,
and 5; 26; 27; 28; 28 bis; 28 ter; 29; 29 bis; 29 ter; 30; 31; 32; 33; 34; 35; 36; 37, §1; 37
bis; 38; and 39; or of the related duties established by the regulations and other
enforceable measures adopted pursuant to this law, the Financial Intelligence Authority
shall impose a pecuniary administrative sanction ranging from €10,000 to €250,000, for
the natural persons, and from €10,000 to €1,000,000 for the legal persons.

(b) The sanctions shall be determined pursuant to the criteria set forth in Law n. CCXVII of
14 December 1994.

(c) The import of the sanction shall be acquired by the Holy See and it is destined to the
charitable and religious works of the Roman Pontiff.

(d) The person sanctioned may object to the decision of the Financial Intelligence Authority
resorting to a Single Judge. If it is a legal person, the entity sanctioned may take action
against the natural person responsible for the violation.

(e) The preceding provisions shall be applied without prejudice to the disciplinary procedures
related to an employment relationship.

812. The available administrative sanctions range from €10,000 up to €250,000 for natural persons.

813. Criminal sanctions for legal persons are dealt with under Recommendation 2 above. In
HS/VCS there was no criminal liability for legal persons as, in the view of the authorities, this
would be inconsistent with fundamental principles of domestic law. In addition it is not clear yet
to what extent, if at all, criminal sanctions are possible in cases of infringement of the several
articles of Act No. CXXVII relating to Chapters other than II (criminal provisions on money
laundering) and III (other forms of criminal activity). Although criminal sanctions, are in cases of

82

On 23 February 2012, a request was transmitted by the FIA regarding an updating on the acquisition of
information on customers and persons delegated to operate on their behalf, the improvement of front office
documentation and integration of electronic procedures for classification of customers in the risk categories,
and on agreements of AML cooperation with foreign banks.

149

infringement of the several articles of the original and revised AML/CFT Laws relating to
Chapters other than II and III for natural persons are not specifically provided for in the
AML/CFT Law, Art. 9 of the Act on Sources of Law (see Annex XII) provides that "Should any
penal provision be lacking, and an act has been committed that offends the principles of religion
or morals, public order, personal security or safety of things, the judge may refer to the general
principles of the legislation to inflict pecuniary penalties up to €3,000, or detention penalties up to
six months, and apply, as the case may be, the alternative sanctions indicated in Law of 14
December 1994, No. CCXXVII". This is a unique solution which introduces the possibility of
criminal sanctions in the most egregious cases.

814. R. 17.4 requires that the range of sanctions available should be broad and proportionate to the
severity of a situation. They should include the power to impose disciplinary and financial
sanctions and the power to withdraw, restrict or suspend the financial institution's licence, where
applicable.

815. Article 42, §2 states that sanctions shall be determined pursuant to the criteria set out in Act
No. CCXVII of December 14, 1994 on modifications to the penal system (see Annex XIV). This
Act describes that the pecuniary administrative sanction should be proportionate to the severity of
the situation (Art. 2). According to the authorities, this principle of proportionality also means that
the FIA has the power to impose disciplinary sanctions. The authorities explained that, via
Regulation No 3 Art. 12, the FIA issued guidance under the old law that was validated under Art.
2 of the new Decree where it was stated that all existing Regulations were adopted in so far as
they were compatible with the new law.

816. Regulation No. 3 Concerning Administrative Sanctions included a provision to "maintain the
rules concerning disciplinary measures in relation to work relationships with the Holy See or with
Vatican City State". The authorities explained further that through Art. 12 of this Regulation, the
disciplinary actions of the General Regulation of the Roman Curia could be applied as described
in Art. 70 and further. Those articles describe the following disciplinary sanctions: written
warnings; instructions; and dismissal of employees. Unfortunately those disciplinary sanctions are
not explicitly given to the FIA. A change to this guidance on this particular issue seems not to be
feasible while this power of the FIA to issue guidance is now more restricted. In addition, it is
unclear to what extent those disciplinary actions can be practically applied to the IOR while, for
example, directors are not hired under the conditions of the General Regulation of the Roman
Curia. For those cases the Cardinals Commission might have the power to dismiss presidents and
vice-presidents as described in Art. 8 of the Council of Superintendence. Regarding the Cardinals
Commission, there remains the issue of its status as to whether it is an internal body of the IOR or
in fact an independent 'supervisor'. The examiners were unclear on this.

817. In addition the term proportionality as described in Act CCXVII seems to refer, in particular,
to the pecuniary administrative sanctions.

818. The range of sanctions does not include the power to withdraw, restrict or suspend a licence.
IOR and APSA are formally not 'licensed'. As such these are "licensed" via the Chirograph and
the Pastor Bonus respectively.

819. On the 14 th of November 2011 the FIA issued Regulation No 3 concerning administrative
sanctions in case of infringements of duties by Act No. CXXVII (see Annex XIX). This
Regulation refers to the old Art. 42 and in addition describes procedures for challenges and
notifications and provides rules for injunctions, the terms of deposits and enforcement.

820. Art. 42 bis of the new law stipulates:

1. In case of conviction for one of the crimes set forth in Arts. 412 bis and 138 ter of the Penal
Code, the judicial authority shall impose an administrative economic sanction ranging from
€20,000 to €2,000,000 to the legal person involved if:

150

a) the person convicted exercised its legal representation, management, direction, or a
similar role;

b) the person convicted was under the direct responsibility, supervision or control or one of
the persons referred to in paragraph a);

c) the crime was committed in favour of the legal person.

821. The same article further defines in paragraph 2 when legal persons are not deemed
responsible. It also stipulates in paragraph 3 that in addition to the economic administrative
sanctions, a temporary interdict on the exercise of its activities shall be imposed if certain
conditions apply.

822. Under the standard, sanctions must be available in relation both to financial institutions and to
their directors and senior management. The revised AML/CFT Law does not provide any specific
sanctions for the directors and senior management of the legal person. However, the term "natural
persons" would appear to be broad enough to cover directors and senior management.

823. In conclusion, there are pecuniary administrative sanctions for natural persons. There appears
to be room for imposing some additional disciplinary sanctions, but it is not explicitly clear and
not shown in practice.

824. For legal persons there is an appropriate range of pecuniary sanctions available in case of
convictions for crimes. In addition a temporary interdict can be imposed. There seems to be room
for imposing some additional disciplinary sanctions, but it is not explicitly clear and not shown in
practice. Furthermore there is no ability to withdraw or suspend a licence. In addition there are no
specific sanctions available for the directors and senior management of financial institutions
although they would fall within the definition of "natural persons". Furthermore, as APSA is
regarded as a public authority the newly introduced sanctions appear not to apply to APSA

825. Although the new law is a substantial improvement by adding sanctionability for legal
persons, it still raises concerns regarding the effective, proportionate and dissuasive nature of
criminal, civil or administrative sanctions for the following reasons:

a) as APSA is regarded as a public authority the newly introduced administrative sanctions
appear not to apply to it;

b) the existence of additional disciplinary sanctions for natural and legal persons is not
explicitly clear and not shown in practice;

c) explicit sanctions are not available for directors and senior management; and

d) no sanctions have been applied so far.

826. The condition of sufficient effective, proportionate and dissuasive criminal, civil or
administrative sanctions are not fully met. The range is reasonably broad but could be improved
with regard to disciplinary sanctions, and applied to APSA.

827. It is noted that Art. 42 and 42 bis of the revised AML/CFT Law provide that "The import of
the sanction shall be acquired by the Holy See and it is destined to the charitable and religious
works of the Roman Pontiff. Bearing in mind that financial sanctions in the context of HS/VCS
inevitably would involve simply transferring money from one HS/VCS account to another it
seems to the evaluators that, in the particular circumstances of the HS/VCS, the publication of any
financial or other sanctions imposed would be of greater utility.

Market entry

Recommendation 23

(23.3, 23.5, 23.7) licensing/registration elements only

151

828. This Recommendation also requires that supervisors or other competent authorities should
take the necessary legal or regulatory measures to prevent criminals or their associates from
holding or being the beneficial owner of a significant or controlling interest, or holding a
management function, including in the executive or supervisory boards, councils, etc. in a
financial institution. In this context IOR and APSA are to be qualified as financial institutions
according to the FATF methodology, taking into account the financial services they provide to their
customers.

829. HS/VCS has taken no specific measures to involve the supervisor in the process of licensing and
approving senior staffing financial institutions.

830. Directors and senior management of IOR and APSA are not specifically evaluated and
'licensed' on the basis of "fit and proper" criteria including those relating to expertise and
integrity.

831. Nevertheless the heads and governing boards of the legal entities performing operations that
could be relevant in the light of the FATF Recommendations in the HS/VCS are subject to the
discipline of the General Regulation of the Roman Curia of 1999 (see Annex IX). This Regulation,
regarding hiring and retention of staff, requires a high standard, both moral and professional. In
particular, Art. 14 provides that executives shall be chosen 'among those distinguished for virtue,
prudence, knowledge, due experience' (paragraph 1). Art. 13, paragraph. 4 establishes that 'the
qualification of candidates shall be assessed on the grounds of appropriate titles of competence'.
Art. 55, paragraph. 2, p. 2 provides for continuous vocational training.

832. In practice both the elements 'fit' and 'proper' appear to be met by the General Regulation.

833. In addition the new law requires in Art. 2 ter that "subjects shall select those who exercise
managerial functions, direction or control, among persons of suitable competence and
professionalism".

834. According to the HS/VCS authorities and upon request confirmed by IOR and APSA, there
are no natural and legal persons providing money or value transfer services, or a money or
currency changing service in HS/VCS. Criterion 23.5 is therefore not applicable.

835. Under criterion 23.7, financial institutions (other than those mentioned in Criterion 23.4)
should be licensed or registered and appropriately regulated. While IOR and APSA are regulated
as described above, they are not licensed. IOR and APSA are "licensed" as such via the
Chirograph and the Pastor Bonus respectively.

On-going supervision and monitoring

Recommendation 23 & 32

(23.4, 23.6, 23.7) - supervision/oversight elements only) & 32. 2d

836. Criterion 23.4 requires that, for financial institutions that are subject to the Core Principles 83 ,
the regulatory and supervisory measures that apply for prudential purposes and which are also
relevant to money laundering, should apply in a similar manner for anti-money laundering and
terrorist financing purposes, except where specific criteria address the same issue in this
Methodology. The activities as mentioned in the footnote and which are subject to the Core
Principles, are regulated under Art. 2 (old and new) of the AML/CFT Law and take place. They
could therefore fall under the Core Principles but for this subscription is necessary by the IOR. So
far the IOR has not subscribed to the Core Principles. Consequently, those entities do not fall
under the Core Principles and indeed, in practice, are not supervised by a central bank, nor

83 Broadly speaking this refers to: (1) banking and other deposit-taking business, (2) insurers and
insurance intermediaries, and (3) collective investment schemes and market intermediaries.

152

assessed in the context of a regular IMF assessment of the Core Principles, therefore this
particular criterion appears not to be applicable.

837. That said it is good to note that the IOR representatives stated that the global regulatory
standard of the Basel Committee on Banking Supervision regarding banking adequacy and market
liquidity risk are applied as 'best practice' with regard to CDD. It was stressed however by IOR
that it is not legally required to do so. It should be noted that if IOR did legally fall under the Core
Principles the relevance for the AML area would be that IOR would need to apply regulatory and
supervisory measures which are relevant to AML, such as:

(i) licensing and structure;

(ii) risk management processes to identify, measure, monitor and control material risks;

(iii) ongoing supervision; and

(iv) global consolidated supervision when required by the Core Principles.

838. As previously stated, at the time of the MONEYVAL on-site visits, no inspections had been
undertaken of the AML/CFT program of financial institutions. No standard manual was available and
no cycle of visits had been determined or planned for. IOR stated that they had asked their supervisor,
the FIA, several times for feedback on their internal procedures but never received a response and
would have appreciated an inspection.

839. In view of the issues at stake between IOR and foreign authorities and the small size of the
financial sector in VCS, it is remarkable that FIA did not undertake an on-site inspection within IOR
to investigate the issues in appropriate detail.

840. According to the HS/VCS authorities and upon request confirmed by IOR and APSA, there
are no natural and legal persons providing money or value transfer services, or a money or
currency changing service in HS/VCS. This criterion is therefore not applicable.

841. Recommendation 32 requires inter alia that competent authorities should maintain
comprehensive statistics on matters relevant to the effectiveness and efficiency of systems for
combating money laundering and terrorist financing. This should include keeping annual statistics
on on-site examinations conducted by supervisors relating to or including AML/CFT and any
sanctions applied.

842. According to the Art. 33, §5 h) of the original AML/CFT Law, the FIA is required to draw up
statistics concerning the application and effectiveness of the administrative and organisational
measures of prevention and repression of money laundering and financing of terrorism. At the
time of the MONEYVAL on-site visits those statistics had not been drawn up, although it is to be
noted that the FIA only commenced operations on 1 April 2011. Furthermore, the FIA had not
established a policy on the type and extent of statistics it will gather and the criteria for these
statistics.

843. Art. 2 septies §4 of the revised AML/CFT Law states that the Financial Intelligence Authority,
using, inter alia, the information gathered while fulfilling its tasks as set forth in paragraph 3,
shall:

a) prepare analysis and studies on particular sectors or instances of the economic and
financial activity that deemed to be under risk, and even on single anomalies that can be
traced back to incidents of money laundering or financing of terrorism;

b) release to the public periodic reports containing non-confidential statistics and
information related to the exercise of its own activity.

844. At the time of the MONEYVAL on-site visits no such statistics had been produced.
Effectiveness and efficiency

845. No sanctions have been applied since the commencement of FIA operations on 1 April 201 1.

153

846. No entities have been licensed or licences withdrawn or suspended. Furthermore it appears
that the FIA does not have the power to do so.

847. Directors and senior management are not specifically evaluated on the basis of 'fit and proper'
but in practice both elements seem to be met by the General Regulation.

848. There is no ongoing supervision and monitoring effectively in place.

849. No comprehensive statistics have been maintained on matters relevant to the effectiveness and
efficiency of systems for combating ML and FT, such as annual statistics on on-site examinations
by supervisors or sanctions applied.

Recommendation 25 (Guidance for financial institutions other than on STRs)

850. Competent authorities should establish guidelines that will assist financial institutions and
DNFBP to implement and comply with their respective AML/CFT requirements. At a minimum,
the guidelines should give assistance on issues covered under the relevant FATF
Recommendations, including a description of ML and TF techniques and methods and any
additional measures that these institutions and DNFBP could take to ensure that their AML/CFT
measures are effective.

85 1 . Relevant parts of Art. 33 §5 of the original AML/CFT Law provides that the FIA:

a) supervises the observance of the duties established in matters of prevention and countering
of money laundering and financing of terrorism and issues provisions for the
implementation of the rules contained in this Act, except for those contained in Chapters II
and III; furthermore, it has the power to issue guidelines and particular directives with
reference to the subjects on which the duties foreseen in this Act are imposed;

b) issues and periodically updates indicators of anomalies in order to facilitate the
identification of suspect operations;

c) receives the communications referring to suspect operations and provides for the
performance of the required investigations in view of possibly reporting them to the
Promoter of justice at the Tribunal;

f) proposes possible integrations and changes of the legislation in matters of prevention and
countering of money laundering and financing of terrorism;

g) prepares, after hearing the obligated subjects, programmes of training of the personnel to
let them be aware with the law into force and the activities that could be connected with
money laundering or financing of terrorism;

h) draws up statistics concerning the application and effectiveness of the administrative and
organisational measures of prevention and repression of money laundering and financing
of terrorism;

i) carries out studies in matters of prevention and countering of money laundering and
financing of terrorism and develop and disseminate models and format descriptive about
unusual behaviours on the economic and financial level, referable to possible activities of
money laundering or financing of terrorism.

852. In the revised AML/CFT Law Art. 2 septies, §2 c) gives the FIA the obligation to issue
guidelines and implementation norms regarding:

i. the requirement set forth by Art. 2 ter regarding the adoption of policies, organisational
instruments, measures and procedures;

ii. the requirements set forth in Chapters V, VI and VII regarding the adequate
verification, registration, preservation of records, and the reporting of suspicious
transactions;

iii. wire transfers.

154

853. Between 1 March 2011 and 14 November 2011, the FIA issued several Regulations and
Instructions. Besides the ones regarding STRs as discussed earlier, the FIA has issued:

• Regulation No 1 concerning the carrying of cash on entering or leaving the VCS.

• Regulation No 2 concerning the transportation of cash and financial instruments entering
or leaving the VCS.

• Regulation No 3 concerning administrative sanctions in case of infringements of duties
established by the AML/CFT Law.

• Regulation No. 4 of the Financial Intelligence Authority regulating requirements vis-a-vis
the transfer of funds according to Art. 38, §4 of act No. CXXVII of the 30th of December
2010.

•

•

Regulation no. 5 of the authority of financial information governing the content, modes of
identification, also through indicators of anomaly and forwarding of suspicious reports.

Instruction No 1 in matters of organisation, procedures and internal controls.

• Instruction No 2 in matters of assessment of risk factors and CDD.

• Instruction No 3 regulating the identification of states considered as having an equivalent
regime.

• Instruction No. 4 of Indicators of Anomalies for the reporting of suspicious transactions.

854. The FIA was also involved in the preparation of changes to the AML Law.

855. While the Regulations and Instructions all refer to and mention the old law as the basis for
their existence, the question arises regarding the extent that they are still valid. The new law
answers this question in that it states under article 2 that all existing Regulations were adopted in
so far as they where compatible with the new law.

856. Furthermore, effectiveness issues arise as the guidance is harder to understand in certain cases
as several articles in the law have been changed considerably and this has yet to be reflected in
amendments to the guidance. However, the evaluators appreciated the speed with which
amendments to the law were made and that it was not feasible to update the Regulations and
Instructions at the same time. Nonetheless much of the content of the Regulations and Instructions
issued on 1 January 2012 remain valid.

857. Discussions with IOR made clear that they are not satisfied with the guidance given by the
FIA. At the time of the MONEYVAL on-site visits, the IOR had not received sufficient
explanation from the FIA of the Regulations and Instructions issued. Furthermore they
complained that they had not received any feedback on the internal procedures which they sent to
the FIA.

3.10.2 Recommendations and comments

Recommendation 23

858. Under Recommendation 29, it is recommended that the definition of supervision and
inspection is changed so that it is made clear what the powers, as given to the AML supervisor,
encompass in practice and also to create clarity as to the exact meaning of "operational" as
opposed to "full" independence. Uncertainty on those issues also leads to a lack of clarity on the
role and authority of the FIA as supervisor, particularly in the absence of supervisory activities. It
is therefore recommended to create this clarity both by changing the law and by providing a clear
Regulation.

859. The HS/VCS has taken no specific measures to involve the supervisor in the process of licensing
and approving senior staff in financial institutions.

155

860. Directors and senior management of IOR and APSA are not specifically evaluated and
'licensed' on the basis of "fit and proper" criteria including those relating to expertise and
integrity. It is recommended to give the FIA the power to assess "fit and properness" on an
ongoing basis.

861. It is recommended that the FIA (or another body) take up its supervisory role on AML issues
directly, plan for (a schedule of) inspections, set up a standard manual and work procedure and
provide for feedback proactively.

862. The evaluators appreciate that the FIA has been active since its creation in the preparation of
Regulations and Instructions, and in assessing the range of institutions within the HS/VCS on which
they should primarily focus. Nonetheless the evaluators were very surprised that, by the time of the
MONEYVAL on-site visits, FIA had not conducted an on-site inspection within IOR to assess
compliance in appropriate detail. It is therefore recommended that FIA start a supervisory
inspection with IOR as soon as possible, given the issues at stake between IOR and foreign
authorities and the small size of the financial sector in VCS.

863. As at the time of the MONEYVAL on-site visits, the FIA had issued several examples of
guidance, but had not drawn up statistics concerning the application and effectiveness of the
measures taken, such as annual statistics on on-site inspections by the supervisor or sanctions applied.
It is recommended to do so. It is also recommended to reinstate that requirement in the law.

864. The Recommendation requires that, for financial institutions that are subject to the Core
Principles 84 , the regulatory and supervisory measures that apply for prudential purposes and
which are also relevant to money laundering, should apply in a similar manner for anti-money
laundering and terrorist financing purposes, except where specific criteria address the same issue
in this Methodology. The activities, as mentioned in the footnote and which are subject to the
Core Principles, are regulated under Art. 2 (old and new) of the AML/CFT Law and take place.
They could therefore fall under the Core Principles but for this subscription is necessary by the
IOR. So far the IOR has not subscribed to the Core Principles. Consequently, those entities do not
fall under the Core Principles and indeed in practice are not supervised by a central bank, nor
assessed in the context of a regular IMF assessment of the Core Principles. Therefore this
particular criterion does not appear to be applicable.

865. That said, it is good to note that the IOR representatives stated that the global regulatory
standard of the Basel Committee on Banking Supervision regarding banking adequacy and market
liquidity risk are applied as 'best practice'. It was stressed however by IOR that it is not legally
required to do so. Although formally not subscribing to the Core Principles, in practice the IOR is
involved in 'banking and deposit-taking business', for example when accepting cash deposits
from a client to be placed on the IOR account through the services of a correspondent bank and
administratively booked on the administrative account of the client. Subscription by IOR to the
Core Principles is therefore recommended.

866. It is therefore strongly recommended that IOR is also supervised by a prudential supervisor in
the near future. Even if this is not formally required, it poses large risks to the stability of the
small financial sector of HS/VCS if IOR is not independently supervised. In addition it would
require IOR to implement additional regulatory and supervisory measures which are relevant for
AML. While the AML supervision regime cannot be regarded as being mature for the reasons
described above, the conclusion is that, at the time of the MONEYVAL on-site visits, there was
no adequate independent supervision of the IOR. In line with this, it is recommended to clearly
separate the task of supervision from the FIA as FIU and combine this with adequate prudential
supervision.

84 Broadly speaking this refers to: (1) banking and other deposit-taking business, (2) insurers and
insurance intermediaries, and (3) collective investment schemes and market intermediaries.

156

867. From an AML perspective prudential supervision on IOR would lead to regulatory and
supervisory measures that are also relevant to money laundering such as:

(i) licensing and structure;

(ii) risk management processes to identify, measure, monitor and control material risks;

(hi) ongoing supervision; and

(iv) global consolidated supervision when required by the Core Principles.

Recommendation 17

868. It is recommended to stipulate explicitly in law or, if need be, in guidance what the full range
of FIA's powers are in terms of disciplinary sanctions. Those sanctions should encompass written
warnings, orders to comply with specific instructions accompanied with daily fines for non-
compliance, ordering regular reports, fines for non compliance, barring individuals from
employment in the sector, replacing or restricting the powers of managers, directors, imposing
conservatorship, and at least the ability to withdraw or suspend a licence. All sanctions levied
should be published.

869. It is recommended to make explicitly clear what the criminal sanctions are for natural persons
in cases of infringement of the several articles of Act No. CXXVII relating to Chapters other than
II and III.

870. It is recommended to make explicitly clear that sanctions can be applied to directors and
senior management of financial institutions.

Recommendation 25

871. It is recommended that all regulations and instructions are amended to reflect the revised
AML/CFT Law as they currently all refer to the original AML/CFT Law and to articles that no
longer exist or have been changed considerably.

872. It is recommended to give proactive explanations of the issued Regulations and Instructions to
the financial sector and provide feedback on procedures sent to the supervisor.

Recommendation 29

873. It is recommended that the definition of supervision and inspection in the law is amended to
make it clear that it is not restricted to certain activities.

874. It is recommended that the Regulation of the Pontifical Committee is amended in order to
clarify what is understood by monitoring, verification and inspection. It should also make clear
that it includes -also via on-site inspections- the review of policies, procedures, books and
records, and sample testing. Furthermore, the Regulation should make it explicitly clear what the
impact is of the change from 'full independence' to 'operational independence' and to what extent
this effects the role and tasks of the President and Board of Directors of the FIA as they currently
have a role to set strategy according to the Statute of the FIA.

875. It is recommended to restore Art 33 §2 of the original AML/CFT LAW which gave the FIA
direct access to the financial, administrative, investigative and judicial information, required to
perform its tasks in countering money laundering and financing of terrorism, as the revised law
does not give the FIA those explicit rights.

876. It is recommended that it is made explicitly clear in the Regulation that the legal
empowerment of the supervisory authorities includes the right of entry into the premises of the
institution under supervision, the right to demand books of accounts and other information and the
right to make and take copies of documents.

157

877. It is recommended that the law is amended in such a way so that the supervisor has the right to
impose sanctions against financial institutions, and their directors and senior management for
failure to comply with the powers given to the supervisor.

878. As stated above, no inspections have been executed since the commencement of operations of
the FIA in April 2011. All communication has been achieved via correspondence. IOR states that
it has sent its internal procedures to FIA for acceptance but has never received a response. Taking
into account the issues at stake between IOR and foreign authorities and the small size of the
financial sector in VCS, it is remarkable that FIA did not commence an on-site inspection within
IOR to investigate the issues in appropriate detail. It is therefore recommended that the FIA take
up its supervisory role as soon as possible, including the provision of feedback.

879. One of the members of the Cardinals Committee is also President of the FIA. This could raise
concerns regarding a serious conflict of interest. It is therefore strongly recommended that the
same person should not hold positions in the supervisory body and a supervised body.

880. It is recommended that clarity is provided on the role of the Board of the FIA in terms of
identifying the supervision and sanctioning strategy on the basis of the Statute given the change
towards "operational independence" in the new law.

Recommendation 30

51.

It is recommended that the structure and staffing of the FIA reflect its supervisory role.

882. It is recommended that staff receive appropriate training on the supervisory aspects of their
function.

Recommendation 32

883. So far the FIA has issued several examples of guidance, but has not drawn up statistics
concerning the application and effectiveness of the measures taken; for example, the annual
statistics on on-site inspections by the supervisor or sanctions applied. It is recommended to do

so.

3.10.3

Compliance with Recommendations 23, 29, 17 & 25

Rating

Summary of factors underlying rating

R.17

NC

• The conditions of sufficient effective, proportionate and
dissuasive criminal, civil or administrative sanctions are not fully
met. In particular sanctions are not applicable for ASPA as it is
regarded as a public authority.

• No specific sanctions are available for directors and senior
management.

• No power to withdraw, restrict or suspend a financial institution's
licence.

• No inspections have been executed by the FIA and no
disciplinary or administrative sanctions have been effectively
applied.

• Overall the requirements have been introduced or clarified too
recently to be considered fully effective.

R.23

NC

• Lack of clarity on the role, responsibility, authority and
independence of the FIA as supervisor.

• Directors and senior management of IOR and APSA are not

158

specifically evaluated on the basis of "fit and proper" criteria by
the HA.

IOR and APSA as such are "licensed" via the Chirograph and the
Pastor Bonus respectively but are not by the FIA.

No inspections have been undertaken of the AML/CFT program
of financial institutions; no standard manual is available; no cycle
of visits has been determined or planned for; and no feedback
provided to IOR.

R.25

PC

Regulations and Instructions not
amendments to the AML/CFT Law.

yet updated to reflect

Effectiveness issues arise as the requirements have been
introduced or clarified too recently to allow their application to
be fully assessed.

Lack of further explanation on the issued guidelines or feedback
on the internal procedures that were sent to the FIA.

R.29

NC

Definition of inspection appears to be limited to certain activities.

Both under the old and the new law it is unclear to what extent
inspections include the review of policies, procedures, books and
records, and should extend to sample testing.

No specific power for the FIA to have direct access, to the
financial, administrative, investigative and judicial information,
required to perform its tasks in countering money laundering and
financing of terrorism.

Unclear if the legal empowerment of the supervisory authorities
includes the right of entry into the premises of institutions under
supervision, the right to demand books of accounts and other
information, the right to make and take copies of documents with
a penalty on the institution if its officers fail to comply.

Power to impose sanctions is arranged for in general terms under
Art. 42, without making the link explicit. No explicit
empowerment to sanction directors or senior management.

Conflict of interest on supervisory issues due to one of the
members of the Cardinals' Committee being President of the
FIA.

No inspections have been undertaken by the FIA.

Overall the requirements have been introduced or clarified too
recently to be considered fully effective.

Overall, as no inspections have been executed and the Regulation
is not available it is still unclear what "operational independence"
means and whether the powers of the FIA as supervisor are
adequate (Effectiveness issue).

159

3.11 Money or value transfer services (SR.VI)

3.11.1 Description and analysis

884. There is no explicit prohibition of "money or value transfer service" within the HS/VCS legal
system. However, according to the HS/VCS authorities, and upon request confirmed by IOR and
APSA, there are no natural and legal persons providing money or value transfer services, or a
money or currency changing service in HS/VCS. It is noted that pursuant to Art. 7 of Act No. V
on the Economic, Commercial and Professional Order of 1929, no one is entitled to open shops,
businesses or workshops, even for the exercise of simple trades, nor set up industrial or
commercial enterprises of any kind, nor open offices, studios, agencies or fixed places of delivery
for the exercise of any profession, without obtaining authorisation from the Governor (See also
section 5.1 of this report). The article in practice leads to a prohibition of money or value transfer
services. Thus the VCS has created what is virtually a public monopoly regime and, as such, there
are no independent legal persons registered in the VCS. This Recommendation is therefore not
applicable.

885. IOR and APSA offer to their clients a service of draft cheque issuing provided by
correspondent banks. They do not issue draft cheques in their own name. These draft cheques
must be paid on a bank account only.

Effectiveness and efficiency

3.11.2 Recommendations and comments

886. This Recommendation is not applicable to the HS/VCS.

3.11.3 Compliance with Special Recommendation VI

Rating

Summary of factors underlying rating

SR.VI

NA

160

4 PREVENTIVE MEASURES - DESIGNATED NON FINANCIAL

BUSINESSES AND PROFESSIONS

4.1 Customer due diligence and record-keeping (R.12)

(Applying R.5 to R. 10)

4.1.1 Description and analysis

887. As already set out in section 1.3 above (Overview of the Designated Non-Financial Businesses
and Professions), it should be noted that pursuant to Art. 7. of Act No. V on the economic,
commercial and professional order of 1929, no one is entitled to open shops, businesses or
workshops, even for the exercise of simple trades, nor set up industrial or commercial enterprises
of any kind, nor to open offices, studios, agencies or fixed places of delivery for the exercise of
any profession, without obtaining authorisation from the Governor (See also sections 5.1 and 5.1
of this report). No such authorisation has ever been issued. Accordingly, only DNFBP services
provided by HS/VCS entities as well as cross-border services provided by foreign domiciled
persons are not subject to this authorisation requirement.

The revised AML/CFT Law covers all categories of DNFBP mentioned by the FATF
standard except for casinos (including internet casinos) the establishment of which is expressly
prohibited by the Law. Despite this broad scope of application HS/VCS authorities state that none
of those DNFBP categories exist in the HS/VCS. DNFBP were in particular included into the
AML/CFT Law against the backdrop that the legislator aimed at replicating the respective
European and FATF standard. But it was also intended as a safeguard in order to cover any future
activities, or activities of which the authorities are possibly not yet aware.

In line with the statement of the HS/VCS authorities, the evaluation team found, with one
exception, no indications that relevant services are provided in practice.

890. No real estate transactions take place in the territory of the VCS and no real estate agents are
licensed or registered within HS/VCS. As far as the HS is involved in real estate operations
located on foreign territory and to the extent that real estate agents are involved in such
transactions, foreign law would be applicable according to the territoriality principle.

891. Furthermore, there are neither dealers in precious metals and precious stones nor trust and
company service providers.

892. There are a few foreign domiciled lawyers operating within the HS/VCS and also within its
tribunals.

893. There is also a public notary. The functions of the Vatican City State Notary are set out in Art.
4 §1 of the Law on the Sources of Law, 1 October, 2008, n. LXXI. The functions may be carried
out only by a lawyer of the Holy See designated by the President of the Governorate of Vatican
City State. Under the same provision, lawyers of the Roman Rota and civil lawyers who are
employed or have a professional relationship or a contract with the Governorate of Vatican City
State may also be designated. To date, no more than five notaries have been designated to
practice. Their prevalent activity is drafting last wills and testaments, as well as delegations of
authority. The HS/VCS representatives stress that the notarial activity is nevertheless minimal,
considering that less than five hundred persons reside in the VCS.

894. There are also several foreign domiciled external auditors and accountants operating for
different entities within the HS/VCS. While the HS/VCS authorities acknowledge that such
professionals are active within the HS/VCS, they stress that they do not prepare or carry out
transactions for their clients concerning the activities mentioned under criterion 12.1 (d):

161

• buying and selling of real estate;

• managing of client money, securities or other assets;

• management of bank, savings or securities accounts;

• organisation of contributions for the creation, operation or management of companies;

• creation, operation or management of legal persons or arrangements, and buying and selling
of business entities.

895. While this appears to be true for lawyers and the public notary, the evaluation team takes the
view that there are accountants preparing and carrying out transactions for a client in relation to
the managing of client moneys, securities or other assets, as well as in relation to the management
of bank, savings or securities accounts. This refers in particular to the examination of the financial
statements of the IOR. Therefore the evaluation team concludes that relevant services under R.
12.1 (d) are provided in practice.

896. Furthermore, the evaluation team takes the view that, regardless of the question of whether
relevant services are being provided in practice, the obligations of all DNFBP categories
mentioned in the AML/CFT Law have to be assessed in the context of this evaluation, simply due
to the fact that a legal AML/CFT framework for those categories has been created and it cannot be
ruled out, while unlikely, that relevant services may be carried out in the future.

897. For further details see section 1.3 Overview of the Financial Sector and Designated Non-
Financial Businesses and Professions (DNFBP).

Casinos (including internet casinos)

898. According to Art. 1 bis §1 c) of the revised AML/CFT Law it is prohibited to open casinos.
HS/VCS authorities stress that the term casino comprises land based and internet casinos. There are
no indications that casinos or internet casinos are being operated within the HS/VCS.

899. Prior to the amendments and additions to the AML/CFT Law promulgated by Decree No.
CLIX there was no such express prohibition.

900. The authority responsible for providing internet access is the Vatican Internet Service
("Servizio Internet Vaticano"). The provision of internet services in VCS is centralised; all
servers belong and are under effective control of governmental authorities. Internet traffic is
continuously monitored for content both to avoid access to material contrary to Christian moral
principles, and to defend the Vatican servers from the frequent hacker attacks.

901. Based on this continuous monitoring mechanism internet casino operations could be identified
immediately and the prohibition of such operations would be enforced.

Real estate agents

902. Real estate agents are bound to observe the measures regarding CDD, registration, and record-
keeping, as well as the reporting of suspicious transactions when they engage in a transaction for
buying or selling real state (Art. 2 §1 c) i. of the revised AML/CFT Law).

Dealers in precious metals and dealers in precious stones

903. Dealers in precious metals or stones are subject to the above-mentioned requirements of the
AML/CFT Law, when they engage in a transaction equal or above €15,000 (Art. 2 §1 letter c) ii.
of the revised AML/CFT Law).

Lawyers, notaries and other independent legal professionals and accountants

904. Lawyers, notaries, accountants, and external accounting or tax consultants are subject to the
requirements of the AML/CFT Law:

• when they engage or participate in any financial or real estate transaction; or

162

• when they assist someone to plan or execute transactions relating to;

• buying or selling real estate or business entities;

• managing currency, financial instruments or other funds or other assets;

• opening or managing banking, savings or securities accounts; and

• organising the contributions necessary for the creation, operation or management of
corporations or legal persons.

905. According to the essential criterion they should also be subject to AML/CFT requirements
with respect to the creation, operation or management of legal persons or arrangements and
buying and selling business entities. However, those activities are not covered by the AML/CFT
Law (Art. 2 §1 b) i. of the revised AML/CFT Law).

Trust and company service providers

906. Trust and company service providers are, pursuant to Art. 2 §1 b) i. of the revised AML/CFT
Law, subject to the requirements of the AML/CFT Law, when they:

create a corporation or legal person;

act as director, manager or partner in a partnership, or in a similar position in another kind of
legal person; or

arrange for other persons to occupy such a position;

provide a registered office, a business, administrative or postal address and connected services
to a corporation or legal person;

act as a trustee in an express trust or in a similar entity, or arrange for other persons to act in
such a role;

act as a nominee shareholder on behalf of third persons or arrange that other persons do so,
unless it is a corporation quoted in a regulated market and subject to a disclosure requirement.

Applying Recommendation 5

907. All obligations of the AML/CFT Law as described in this report under Recommendation 5
with respect to financial institutions are applicable to the above-mentioned DNFBP (except for
casinos).

908. Real estate agents and dealers in precious metals or stones are required to fulfil CDD
requirements in the same situations as described under essential criteria.5.2 85 .

909. Art. 28 §2 of the revised AML/CFT Law requires notaries, lawyers, accountants and external
accounting and tax consultants as well as trust and company service providers (hereinafter
referred to as "professionals") to undertake CDD measures:

a) when the professional services have, as their object, means of payment, funds or other assets
equal to or in excess of €15,000;

b) when they provide occasional professional services involving the transfer or movement of
means of payment equal to or in excess of €15,000, regardless of whether it is conducted in a
single transaction or in various transactions connected one to the other;

c) every time that the transaction is of an indeterminate or of an indeterminable value. For the
purposes of customer due diligence requirements, the constitution, management or

85

Only the term "transaction" is defined separately for real estate agents and dealers in precious metals or stones
as a "determined or determinable activity with a financial or patrimonial scope, to be conducted through a
professional service, that modifies the pre-existing legal situation" (Art. 1 No. 27 letter b) AML/CFT Law).

163

administration of a corporation or other legal persons shall always be deemed to involve a
transaction of an indeterminate value;

d) when there exists a suspicion of money laundering or financing of terrorism, regardless of any
derogations, exemptions, or applicable thresholds;

e) when there are doubts about the veracity or adequacy of the data previously obtained for
identification of the counterpart;

910. The establishment of business relations appears not to be covered as a situation where CDD
measures have to be performed and therefore the provision of the AML/CFT Law does not fully
meet the essential criteria (essential criteria. 5.2.).

911. Professionals are required to undertake customer due diligence measures when conducting
their activities individually, jointly, or in association with others (revised AML/CFT Law Art. 28
§2 last sentence). They are required to observe the customer due diligence requirements at the
initial stage of their valuation of the counterparts' position (Art. 29 §2 of the revised AML/CFT
Law).

Applying Recommendation 6, 8, 9, 10, 11

912. All obligations of the AML/CFT Law as described in this report under Recommendation 6, 8,
10 and 11 with respect to financial institutions are applicable to the above-mentioned DNFBP
(except for casinos, whose establishment is expressly prohibited). The same deficiencies as
identified for financial institutions apply also to them.

913. Recommendation 9 is not applicable given that the AML/CFT Law does not provide for
reliance on intermediaries or other third parties to perform elements of the CDD process or to
introduce business. The CDD requirements described under Recommendation 5 have to be
performed by the DNFBP themselves.

Effectiveness and efficiency

914. As outlined above the only DNFBP which currently exist in HS/VCS appear to be foreign
domiciled lawyers operating within the HS/VCS, and also within its tribunals, and one public
notary. In addition, there are a few foreign domiciled external accountants operating for different
entities within the HS/VCS.

915. External accountants appear to be the only DNFBP providing relevant services that fall under
the scope of the AML/CFT Law. The evaluation team takes the view that they are obliged
subjects under the AML/CFT Law to the extent that they assist someone (notably IOR and APSA)
to plan or execute transactions relating to managing currency, financial instruments or other funds
or other assets or alternatively relating to opening or managing banking, savings or securities
accounts.

916. The auditors and accountants met did not take the view that their activities are subject to the
AML/CFT Law. In their view, provided that they were to be considered subject to any AML/CFT
requirements, they felt that they were subject to the respective laws in force in their country of
origin.

917. At the time of the MONEYVAL on-site visits the accountants met had not implemented the
requirements set out in the AML/CFT Law.

4.1.2 Recommendations and comments

918. The authorities should clarify in law or regulation that notaries, lawyers, accountants, external
accounting and tax consultants, as well as trust and company service providers are also required to
undertake CDD measures when establishing business relations.

919. The authorities should set out in law, regulation or "other enforceable means" that trust and
company service providers are subject to CDD and record-keeping requirements with respect to

164

the creation, operation or management of legal persons or arrangements and buying and selling
business entities.

920. The recommended actions in Section 3 above with respect to R 5, 6, 8, 10 and 11 should also
be implemented for DNFBP.

921. The authorities should raise awareness amongst auditors and accountants with respect to their
CDD and record-keeping obligations under the AML/CFT Law, provide training and put in place
appropriate arrangements to monitor and ensure CDD and record-keeping compliance.

4.1.3 Compliance with Recommendation 12

Rating

Summary of factors underlying rating

R.12

PC

• Requirement for notaries, lawyers, external accountants and tax
advisers as well as trust and company service providers to
undertake CDD measures when establishing business relations is
not broad enough.

• Trust and company service providers are not subject to CDD and
record-keeping requirements with respect to the creation,
operation or management of legal persons or arrangements and
buying and selling business entities.

• Shortcomings identified in the context of Recommendations 5, 6,
8, 10 et 1 1 are also applicable to DNFBP.

Effectiveness

• Lack of effective implementation of CDD and record-keeping
requirements in respect of accountants providing services falling
under the scope of the AML/CFT Law.

4.2 Suspicious transaction reporting (R. 16)

(Applying R. 13 to 15 and 21)

4.2.1

Description and analysis

922. The reporting duty, as established under Art. 34.2 of the revised AML/CFT Law, also applies to
all relevant categories of DNFBP. All comments made under section 3.7.1 equally apply to them.

923. Within the framework of the legal systems of the HS/VCS, there are no restrictions or
exceptions to the CDD or the duty to report STR.

924. Several external auditors, lawyers and accountants operate for different entities within
HS/VCS. Those also fall under Art. 2 (old and new) of the Act, and have an obligation to report to
the FIA. This is also recognised by those professionals in their engagement letters, which include
obligations to report to the FIA. So far DNFBP have not filed a report with the FIA.

925. The VCS authorities hold the opinion that there are no DNFBP operating within their
jurisdiction that fall under the AML Law. There has been no outreach to externally based DNFBP
providing services within the HS/VCS. Therefore reporting, is likely to be very low.

Internal control requirements for DNFBP

165

926. Art. 2.1 of the revised AML/CFT Law provides that named obligors are bound to observe the
measures regarding customer due diligence, registration, and record-keeping, as well as the
reporting of suspicious transactions.

927. Under Art. 2, §2 b and c the new law identifies the following professionals:

i. lawyers, notaries, accountants, and external accounting or tax consultants when they

engage or participate in any financial or real estate transaction, or when they assist
someone to plan or execute transactions relating to: buying or selling real estate or
business entities; managing currency; financial instruments or other funds or financial
assets; opening or managing banking, savings or securities accounts; and organising the
contributions necessary for the creation, operation or management of corporations or legal
persons.

ii. Trust and company service providers when delivering certain services.

iii. Real estate agents when they engage in a transaction for buying or selling real estate.

iv. Dealers in precious metals or stones, when they engage in a transaction equal or above

€15,000.

928. The new law stipulates in Art. 2 ter that

a. The subjects referred to in para 2 shall adopt adequate policies, organisational
instruments, measures and procedures to prevent and counter money laundering and the
financing of terrorism, on the basis of the development of new technologies and of the
phenomena of money laundering and terrorist financing.

b. It further states that the subjects shall select those who exercise managerial functions,
direction or control, among persons of suitable competence and professionalism.

c. Those subjects shall adopt policies, programmes and measures to ensure that their
employees, consultants and aides on any grounds, possess an adequate professional level
to permit the proper and effective observance of the requirements set forth in this law.

929. It further clarifies that these measures shall include training programmes and continuous
formation on the prevention of money laundering and the financing of terrorism.

930. With regard to safe harbour and tipping off provisions, the provisions of Art. 34 §4, as set out
in section 3.7 above are also applied to DNFBP.

931. The weaknesses as described under Recommendation 15 regarding financial institutions also
apply to DNFBP.

932. With regard to the requirements of Recommendation 21, there are no effective measures in
place. For further details see section 3.6 above.

Additional elements

933. The reporting requirement was extended under the original AML/CFT Law to the rest of the
professional activities of accountants, including auditing. The new law does not reflect this
additional element anymore.

934. Under Art. 34 §1, DNFBP are required to report to the FIU when they suspect or have
reasonable grounds to suspect that funds are the proceeds of all criminal acts that would constitute
a predicate offence for money laundering domestically.

4.2.2 Recommendations and comments

935. It is recommended that the issues as mentioned under Recommendation R 13, R 14, R 15 and R
21 are also addressed regarding DNFBP.

166

4.2.3

Compliance with Recommendation 1 6

Rating

Summary of factors underlying rating

R.16

PC

• Weaknesses regarding reporting as described under R 13 are also
relevant for this Recommendation.

• As the VCS authorities held the opinion that there are no
DNFBP operating within their jurisdiction that fall under the
AML Law, therefore there was no outreach to them and
reporting is likely to be low.

• The weaknesses as described under Recommendation 15
regarding financial institutions also apply for DNFBP.

• The weaknesses as described under Recommendation 21,
regarding giving special attention to business relationships and
transactions with persons from or in countries which do not or
insufficiently apply the FATF Recommendations, also apply for
DNFBP.

4.3 Regulation, supervision and monitoring (R. 24-25)

4.3.1

Description and analysis

Recommendation 24

936. As described above, Art. 2 letters p and q of the original AML/CFT Law and Art. 2 of the
revised AML/CFT Law place several DNFBP under the scope of the Act. The relevant FATF
Recommendations are therefore applicable and need to be assessed.

937. In addition in HS/VCS several lawyers operate within its tribunals and HS/VCS has one
public notary. Future activities of those DNFBP might fall under the scope of the FATF
Recommendations unless those activities are clearly prohibited. The content of those activities
have to be supervised.

938. As noted above, several external auditors, lawyers and accountants operate for different
entities within HS/VCS. Those also fall under Art. 2 (old and new) of the Act, and have an
obligation to report to the FIA and they should be supervised by the FIA. This is also recognised
by those professionals in their engagement letters, including their obligation to report to the FIA.

939. There are no casinos operating within the jurisdiction of HS/VCS nor are they recognised. The
essential criteria also requires taking measures against internet casinos. It requires that countries
should establish rules to determine the basis or set of factors upon which it will decide whether
there is a sufficient nexus or connection between the internet casino and the country. Examples of
such factors include incorporation or organisation under the laws of the country, or place of
effective management within the country.

940. In the new law Art. 1 bis, letter c, explicitly prohibits the opening of gambling houses. For
internet casinos it is then important to have an (enforcement) strategy to prevent effective
management of an internet casino within the country. Within the VCS there is an effective
internet filtering system that prevents access to internet casinos from within the VCS. Likewise
the same filtering system prevents servers located within the VCS from being utilised for the
purposes of internet gambling.

167

941. As the activities carried out by DNFBP are subject to the same requirements as financial
institutions, the same shortcomings as mentioned above are applicable to DNFBP.

942. The FIA is responsible for the supervision of financial institutions and DNFBP. So far the FIA
has not commenced supervision of DNFBP.

943. The weaknesses regarding the power of the FIA to apply sanctions as described under R 17
also have an effect under this Recommendation.

944. The weaknesses as described regarding the powers of the FIA to perform inspections and what
rights these entail, as described under R 29 and R 23, also have an effect under this
Recommendation.

945. There are no specific resources allocated to the supervision of DNFBP. While there are not
many auditors and lawyers delivering services to entities and financial services within the
HS/VCS, supervision of them will not require much resource but it is important at least to make
some supervisory staff responsible for DNFBP issues.

Recommendation 25 (Guidance for DNFBP other than guidance on STRs)

946. On the basis of both the old and the new AML Law the FIA has the power to issue guidelines.
So far the FIA has issued several guidelines but did not issue specific guidelines for DNFBP.

947. As the instructions are "addressed to the subjects who are required to observe the duties
concerning the prevention of money laundering and financing of terrorism pursuant to Art. 2 of
the old and new AML Law" they can be regarded as covering the DNFBP. It nevertheless has to
be noted that HS/VCS during the MONEYVAL on-site took the position that DNFBP are not
operating in HS/VCS. As such the issued guidance had not the intention to cover them.

4.3.2

Recommendations and comments

948. As several external auditors and lawyers work for entities within HS/VCS it is recommended
that the FIA issues a specific guideline for those DNFBP, in particular how they have to report to
the FIA.

949. It is recommended that FIA commence supervising the activities of DNFBP.
4.3.3 Compliance with Recommendations 24 and 25 (criterion 25.1, DNFBP)

Rating

Summary of factors underlying rating

R.24

NC

• The weaknesses regarding the power of the FIA to apply sanctions
as described under R 17 also has its effect under this
Recommendation.

• The weaknesses as described regarding the powers of the FIA to
perform inspections and what rights they exactly entail as described
under R 29 and R 23 also have an effect under this
Recommendation.

• Supervision or monitoring of DNFBP has not taken place.

R.25

PC

• No specific guidance has been provided for DNFBP operating for
entities within HS/VCS.

168

4.4 Other non-financial businesses and professions/ Modern secure transaction

techniques (R.20)

4.4.1 Description and analysis

950. HS/VCS has considered applying Recommendations 5, 6, 8-11, 13-15, 17 and 21 to non-
financial businesses and professions (other than DNFBP) that are at risk of being misused for
money laundering or terrorist financing.

951. In particular, Recommendation 8 requires that countries should take measures to encourage
the development and use of modern and secure techniques for conducting financial transactions
that are less vulnerable to money laundering.

952. According to the Art. 2, paragraph. 1, of the revised AML/CFT Law, natural and legal persons
obliged under the Act must respect the duties of CDD, recording of relationships and transactions,
keeping of related information and reporting of suspicious transactions; to this end they have to
provide for adequate organisational arrangements and procedures, as well as to assure an adequate
training of the personnel. On this basis, it should also be noted that in view of "technological
updating" the FIA has the power to adopt policies and other measures in accordance with Art. 33,
§5, letters e), f) and g) of the original AML/CFT Law.

953. The new law stipulates in Art. 2 ter that:

• The subjects referred to in paragraph 2 shall adopt adequate policies, organisational
instruments, measures and procedures to prevent and counter money laundering and the
financing of terrorism, on the basis of the development of new technologies and of the
phenomena of money laundering and terrorist financing.

• It further states that the subjects shall select those who exercise managerial functions,
direction or control, among persons of suitable competence and professionalism.

• And that those subjects shall adopt policies, programs and measures to ensure that their
employees, consultants and aides on any grounds, possess an adequate professional level to
permit the proper and effective observance of the requirements set forth in this law.

954. It further clarifies that these measures shall include training programs and continuous
formation on the prevention of money laundering and the financing of terrorism

955. This new article obliges subjects to adopt adequate policies on the basis of the development of
new technologies and phenomena of money laundering.

4.4.2 Recommendations and comments

956. This Recommendation is fully met.

4.4.3 Compliance with Recommendation 20

Rating

Summary of factors underlying rating

R.20

C

LEGAL PERSONS AND ARRANGEMENTS AND NON-PROFIT
ORGANISATIONS

169

5.1 Legal persons - Access to beneficial ownership and control information (R.33)

5.1.1 Description and analysis

957. The position within the VCS concerning matters relevant to FATF R.33 is best regarded as sui
generis. This flows from the fact that Law No. V on the economic, commercial and professional
order of 7 June 1929 (Annex XXX) created what is in effect a public monopoly regime within the
territorial jurisdiction of the VCS. In their response to the MEQ (at p. 134) the authorities
emphasised that, as a consequence of the above-mentioned Act, "there are no legal persons
exerting profit oriented activities (in particular, there are no companies that issue bearer shares)".

958. This unique feature was emphasised by the relevant authorities with some frequency in the
course of the MONEYVAL on-site visits and in particular by representative of the Governorate.
Indeed, the impressions formed by the evaluation team while in the VCS were entirely consistent
with this characterisation of the situation.

959. In the view of the evaluators the structural, legal and institutional realities within the VCS at
present renders, exceptionally, R.33 non applicable.

960. It must be acknowledged, however, that the current situation might evolve in the future. This
point was accepted by the HS/VCS in responses to the MEQ (see, e.g., p.22 and p. 134). Were this
to happen within the present context reliance can be placed on the Italian Civil Code of 1942
"together with the acts that modified it" up to 1 January 2009. This incorporation flows from the
operation of Art. 4 of Act No. LXXI on the sources of law of 1 October 2008 (see Annex XII). As
can be seen from the analysis of R.33 contained in the 2006 FATF mutual evaluation of Italy (at
pp. 89-91) the system so provided is both detailed and broadly consistent with international
standards and expectations. In the MER of Italy it is noted that the Italian Civil Code allows for
bearer shares for joint stock companies as well as for limited partnership companies but the
position has been largely reversed by subsequent Italian legislation. The authorities of the VCS
have confirmed that these limiting measures have been received into the legal system of the VCS.

Additional elements

961. Exceptionally this Recommendation is not applicable to the VCS.

5.1.2 Recommendations and comments

962. In the event that the VCS decides to depart from the current public monopoly regime it would
be necessary for detailed consideration to be given to the adequacy of the relevant provisions of
the Italian Civil Code when viewed in the light of existing international standards and to
supplement the same as required. Practical steps to facilitate the effective operation of the system
should also be implemented at that time. In so doing the VCS can readily build upon the
obligations concerning registration of legal persons, now reflected in the Art. 2 quater of the Law
of January 2012. This is discussed in the context of R.34 below.

5.1.3 Compliance with Recommendation 33

Rating

Summary of factors underlying rating

R.33

N/A

170

5.2 Legal Arrangements - Access to beneficial ownership and control information

(R.34)

5.2.1 Description and analysis

963. Recommendation 34 requires countries to take measures to prevent the unlawful use of legal
arrangements for the purposes of money laundering and terrorist financing particularly by
ensuring that there is adequate, accurate and timely information on express trusts, including
information on the settlor, trustee and beneficiaries that can be obtained or accessed in a timely
fashion by competent authorities.

964. The law of the VCS does not provide for the creation of trusts. Furthermore, and in contrast to
the position in Italy, the VCS is not a party to the Hague Convention of 1 July 1985 on the law
applicable to trusts and their recognition. In the view of the evaluators these factors, in
conjunction with the structural and institutional realities within the VCS at present, render,
exceptionally, R.34 non applicable.

965. It must be acknowledged that the legal position in this sphere might evolve in the future. Were
that to happen within this context the authorities of the VCS can readily build upon its existing
system as it relates to legal persons. Of particular relevance is the obligation of registration of
legal persons now provided for in Art. 2 quarter of the AML Law of January 2012. It reads in full
as follows:

1. Legal persons having their registered office in the State, regardless of their nature and
activity, shall register, pursuant to the domestic law in force, before the Governorate,
where information regarding their nature, activities, organisation, organs of administration,
direction and control, and its members, shall be kept and updated.

2. The registry referred to in paragraph 1 shall be accessible to the competent authorities for
the prevention and countering of money laundering and financing of terrorism.

966. Following the visit paid by the evaluation team to the VCS in March 2012 the Governorate
summarised the system of registration and its current requirements as follows:

The Registers of Vatican Legal Persons are two: one civilian and one canonical, depending
on its institutional or religious purpose (or mission).

The Registers are composed of analytic entries that contain specific data on the legal persons
and in particular:

1 . name or denomination,

2. date of founding,

3. its purpose or mission,

4. its juridical nature or composition,

5. its address,

6. its legal representative,

7. description of its activities, and

8. the date of registration.

These entries have a registration number that corresponds to a specific position in the
Register and are signed by the Secretary General of the Governorate of Vatican City State.
Any subsequent variation of the original data in the Register must be submitted on a new

171

entry by the Legal Person and once again approved with the signature of the Secretary
General of the Governorate.

The registers of Vatican Legal Persons are public and may be consulted by anyone who has
a valid interest through application to the competent authorities in the Governorate.

The documents required for registration are:

• The constitutional act of the Legal Person (notarial act or pontifical chirograph).

• Statutes and by laws containing:

b) the name,

c) purpose,

d) activity,

e) estate,

f) social organs,

g) name of legal representative at the moment of its founding,
h) disposition of its budgets/balance sheets,

i) the devolution of its estate if and when the Legal Person is cancelled.

• Documentation in relation to the authorisation granted for registration (letters of
request from the individual and Vatican Secretariat of State).

967. It should be stressed that the obligations concerning registration would apply automatically
should the legal system of the VCS ever be extended to the creation of trusts. This flows from the
decision to specifically include reference to trusts, prophylactically, in the definition of "legal
persons" contained in Art. 1(3) of the Law of January 2012. The same Act, and on the same basis,
also lists "trust and company service providers" as obligated entities (Art. 2(b)(ii)). This explicitly
extends to one who acts "as a trustee in an express trust or in a similar entity".

Additional elements

968. Exceptionally this Recommendation is not applicable to the VCS.

5.2.2 Recommendations and comments

969. Exceptionally this Recommendation is not applicable to the VCS.

5.2.3 Compliance with Recommendation 34

Rating

Summary of factors underlying rating

R.34

N/A

5.3 Non-profit organisations (SR.VIII)

5.3.1 Description and analysis

970. In HS/VCS the only normative act specifically concerned with the operation of non-profit
organisations (NPOs) is Law No. CLXXXVII Concerning Volunteer Activities of 22 May 1992
(see Annex XXXI). This law provides detailed rules on the protection of the non-profit and

172

voluntary sector and the prevention and countering of the unlawful use of non-profit organisations
and voluntary activities. Art. 1 of this law defines volunteer activities as activities that "consist of
offering free and gratuitous services to the Apostolic See". Such activities should have the goal
of:

a) co-operating in the evangelising mission of the Church;

b) contributing to the Christian animation of temporal realities;

c) supporting assistance activities promoted in favour of the poor, sick, immigrants, elderly and
all those who are in need;

d) cooperating, in Christian spirit, in other undertakings of solidarity and human promotion.

971. Art. 4 2. of the Law Concerning Volunteer Activities requires that all such organisations must
be registered in the Register of Voluntary Organisations which is maintained within the
Governorate.

972. In the MEQ the authorities contend that there are only two active organisations which fall
within this definition and which are registered in the Register of Voluntary Organisations,

a. Circolo di San Pietro; and

b. Associazione di San Pietro e Paolo.

973. Pontifical Council Cor Unum, which provides and oversees the provision of international
humanitarian aid, is constituted under Arts. 145-148 of Pastor Bonus and, as such, forms part of
the Roman Curia and is regarded as a dicastery of the Roman Curia. Cor Unum is accountable to
the Prefecture for the Economic Affairs of the Holy See. As such Cor Unum would not be
considered to fall within the FATF definition of an NPO.

974. Furthermore, activities relating to the operation and maintenance of the HS/VCS museum
complex fall under the Department of Pontifical Monuments, Museums and Galleries which is,
itself empowered through paragraph 15 of Act No. CCCLXXXIV on the Government of the
Vatican City State (see Annex XI).

975. There are a number of other organisations that have been established under the laws of the
VCS. These are registered with the Register of Voluntary Organisations. The Office of Public
Registry, Records and Notary handles the official registration of Vatican Legal Persons (civilian
and canonical) and the volunteer organisations; the procedure for registration varies depending
whether the entities have juridical character or are volunteer organisations. Therefore, overall in
the Governorate there exist three Registries:

• the first regards canonical legal persons;

• the second regards Vatican civil legal persons;

• the third regards volunteer organisations.

976. The first two Registries were established in 1993 by the then-President of the Governorate,
after the enactment of the Law no. CCVI of June 28, 1993 (Law regarding Civil Legal
Personalities). The number of entities listed in the Registries is 46, of which 15 have only
canonical legal personality, 5 have only civil legal personality, and 26 have both canonical and
civil legal personality. The third Registry was created by Law No. CLXXXVII concerning
volunteer activities of May 1992, that regulates the activity of volunteer organisations and in it are
listed 2 volunteer organisations as set out above. HS/VCS legal persons pursue a variety of
activities linked to the overarching religious and charitable ends of the Apostolic See. Nine
organisations promote educational activities; six provide humanitarian assistance; nine promote
cultural or artistic activities; nine assist missionary work and the support of public worship; two
promote peace; and fourteen organisations directly provide basic services (health, pensions,
housing) to the HS/VCS staff. A full list of registered entities can be found in Annex XXXVI.

977. The definition of volunteer activities under the Law Concerning Volunteer Activities is
extremely limited compared with the definition of non-profit organisation under the FATF

173

Methodology which states "The term non-profit organisation or NPO refers to a legal entity or
organisation that primarily engages in raising or disbursing funds for purposes such as charitable,
religious, cultural, educational, social or fraternal purposes, or for the carrying out of other types
of "good works". As such there are a significant number of NPOs that are formed and registered
within the jurisdiction of HS/VCS that fall within the FATF definition of NPOs yet fall outside
the scope of the Law Concerning Volunteer Activities (e.g. Caritas Internationalis, The Equestrian
Order of the Holy Sepulchre of Jerusalem, etc.). All such organisations are accountable to the
Supreme Pontiff but do not appear to be subject to any other form of supervision or regulation. At
the time of the MONEYVAL on-site visits, the HS/VCS authorities were unable to provide the
evaluators with a list or register of such organisations and it was therefore not possible to establish
the scope or scale of their activities.

978. There is no legislation relating to countering the financing of terrorism which places any
requirements on the NPO to institute CFT preventive measures or submit reports on suspicious
transactions to the FIA. NPOs are not subject to the provisions of the AML/CFT Law, except in
circumstances where they specifically perform those activities which are defined by Art. 2 of the
revised AML/CFT Law.

979. Overall the NPO sector in the VCS controls significant flows of funds and many of the
relevant organisations have international connections. As such, this sector requires a greater
degree of oversight.

Reviews of the domestic non-profit sector

980. The HS/VCS authorities consider that, given that there are only two registered organisations,
the regulation of the sector seems to be adequate and guarantees a high standard of protection
against the unlawful use of the non-profit and voluntary sector, and in particular the pursuit of the
goals of preventing and countering the infiltration of criminal or terrorist organisations,
laundering of proceeds of criminal activities and financing of terrorism. This view is not,
however, based on a empirical review of their activities to establish the vulnerability of activities
to terrorist financing.

981. Furthermore, at the time of the MONEYVAL on-site visits, no formal review of the broader
NPO sector had taken place to establish the adequacy of the legal and regulatory framework and
the potential vulnerabilities to terrorist activities.

Protecting the NPO sector from terrorist financing through outreach and effective oversight

982. In the course of the first MONEYVAL on-site visit the evaluators met with representatives of
two NPOs, Cor Unum and The Equestrian Order of the Holy Sepulchre of Jerusalem. The
representatives of Cor Unum, which is a dicastery (Pastor Bonus Arts. 145-148) stated that they
had met with the FIA and had received guidance and advice on how to apply the AML/CFT Law
(although it does not apply to them) and considered that they were sufficiently aware of the risks
of terrorist abuse. The representatives of The Equestrian Order of the Holy Sepulchre of
Jerusalem had not, however, been the recipients of any outreach or other training concerning the
risks of terrorist abuse.

983. The HS/VCS authorities consider that the provisions of the Law Concerning Volunteer
Activities provide detailed rules on the protection of the non-profit and voluntary sector and the
prevention and countering of the unlawful use of non-profit organisations and voluntary activities.
As previously stated, this law is limited in scope and, in practice, only two organisations are
subject to it. Furthermore, the law is limited to requiring registration and the filing of certain
defined details (e.g. a list of volunteers and activities foreseen, balance sheets and evidence of
financial resources). The law does not introduce any requirements regarding the prevention of the
risk of the organisation being used for terrorist financing.

174

984. No written guidance for the NPO sector was provided to the evaluators at the time of the
MONEYVAL on-site visits and details were not provided of any training or awareness raising
initiatives undertaken for the sector as a whole.

985. Art. 4 3. of the Law Concerning Volunteer Activities requires organisations to file a copy of
their statutes and any other appropriate documentation concerning their internal organisation, a
list of volunteers and activities foreseen, balance sheets and evidence of financial resources at the
time of application for admission to the register. Art. 4 5. requires them to update this information
annually.

986. Although there is no overarching requirement to do so, the two NPOs which were met by the
evaluators both produced an annual report which was audited and available to interested parties.

987. A number of the other NPOs which are based in HS/VCS do produce comprehensive annual
reports which are audited and which provide details of the organisations' objectives, the identity
of controllers including senior officers, board members and trustees as appropriate as well as
accounting for funds received and dispersed. However, their disclosures are made in accordance
with the requirements of the organisations statutes not as a consequence of any overarching
requirement by HS/VHS.

988. There are no appropriate measures in place to sanction violations of oversight measures or
rules by NPOs or persons acting on behalf of NPOs either in the Law Concerning Volunteer
Activities or elsewhere.

989. Art. 4 5. of the Law Concerning Volunteer Activities requires that organisations subject to the
law submit annual updates on the information filed at the Register. There is no specific
requirement in the law to maintain books and records. Apart from the requirements of the Law
Concerning Volunteer Activities, there are no other requirements in place for NPOs registered in
HC/VCS regarding the maintenance and retention of books and records. As a consequence of this,
there is no requirement for NPOs to maintain, for a period of at least five years, and make
available to appropriate authorities, records of domestic and international transactions that are
sufficiently detailed to verify that funds have been spent in a manner consistent with the purpose
and objectives of the organisation.

990. Overall the scope of outreach and oversight of the whole NPO sector appears to be limited to
those organisations that fall directly under the responsibility of the Curia or the Governorate, with
little or no outreach to other NPOs.

Targeting and attacking terrorist abuse of NPOs through effective information gathering,
investigation

991. As set out above, there are three separate registers although, in aggregate, these cover all
registered persons. In practice there are no independent profit making entities in the VCS (see
section 5.1 above) therefore all entities entered on the registers could be regarded as non-profit
organisations. It is noted, however, that only those organisations registered under the Law
Concerning Volunteer Activities and Cor Unum are subject to any formal system of regulation.
Furthermore, neither the Law Concerning Volunteer Activities nor Pastor Bonus contain any
provisions concerning record keeping or access to books and records, etc.

992. The Law Concerning Volunteer Activities does require the filing and updating of certain
information regarding volunteers, activities undertaken and financial data which would be
available to investigating authorities.

993. The civil and canonical registers are composed of analytic entries that contain specific data on
the legal persons and hold the same data as set out under section 5.2 above.

994. These entries have a registration number that corresponds to a specific position in the Register
and are signed by the Secretary General of the Governorate of Vatican City State. Any subsequent
variation of the original data in the Register must be submitted on a new entry by the Legal
Person and once again approved with a signature of the Secretary General of the Governorate.

175

The Registers of Vatican Legal Persons are public and may be consulted by anyone who has a
valid interest through application to the competent authorities in the Governorate. The documents
required for registration are set out under section 5.2 above.

995. Although there is no specific register dedicated to NPOs based in HS/VCS, given the small
number of entities involved (48) this does not constitute a major problem. However, there is no
comprehensive system to ensure effective domestic co-operation, co-ordination and information
sharing to the extent possible among all levels of appropriate authorities or organisations that hold
relevant information on NPOs of potential terrorist financing concern.

996. However, there are no provisions which apply to the broader range of NPOs operating within
HS/VCS. Therefore, it must be concluded that there are no wider provisions which grant
investigating authorities full access to information on the administration and management of a
particular NPO (including financial and programmatic information) which may be obtained
during the course of an investigation.

Responding to international requests for information about an NPO of concern

997 '. As stated above, there is a lack of any form of centralised registration or supervision of NPOs
as a whole and there do not appear to be any powers for investigating authorities to obtain
information. Furthermore, there do not appear to be any appropriate points of contact or
procedures to respond to international requests for information regarding particular NPOs that are
suspected of terrorist financing or other forms of terrorist support.

5.3.2 Recommendations and comments

998. There are a number of organisations that are registered within the VCS that fall within the
FATF definition of "non-profit organisations". Most of these organisations do not fall within the
scope of the AML Law and do not appear to be subject to AML/CFT supervision or regulation.
No formal review of the adequacy of domestic laws and regulations, as the international standard
requires, has been undertaken. Although individual foundations may be subject to constitutions
that require financial transparency there are no overarching provisions covering this high risk
sector requiring this, nor are there any specific record keeping requirements.

999. The HS/VCS authorities should undertake a review the adequacy of domestic laws and
regulations that relate to all NPOs located within VCS and conduct an assessment of the sector's
potential vulnerabilities to terrorist activities.

1000. The FIA should have its responsibilities extended to risk-based monitoring of the NPO sector
with necessary access to relevant books and financial records.

1001. The HS/VCS authorities should develop guidance on the risks of terrorist abuse and the
available measures to protect against such abuse for all NPOs which are located within VCS and
then undertake outreach to raise awareness within the sector.

1002. Legislation needs to be developed to:

a) Require NPOs to maintain and file records on the purpose and objectives of their stated
activities and the identity of person(s) who own, control or direct their activities, including
senior officers, board members and trustees;

b) Require NPOs to maintain, for a period of at least five years, and make available to
appropriate authorities, records of domestic and international transactions that are sufficiently
detailed to verify that funds have been spent in a manner consistent with the purpose and
objectives of the organisation; and

c) sanction violations of oversight measures or rules by NPOs or persons acting on behalf of
NPOs.

1003. Legislation needs to be developed to provide the FIA and Gendarmerie with full access to
information on the administration and management of a particular NPO (including financial and
programmatic information) during the course of an investigation.

176

1004. Formal procedures for national co-operation and information exchange between the national
agencies which investigate ML/FT cases should be developed.

1005. An appropriate point of contact should be identified to respond to international requests for
information regarding particular NPOs that are suspected of terrorist financing or other forms of
terrorist support. Procedures should be developed to process such requests.

5.3.3

Compliance with Special Recommendation VIII

Rating

Summary of factors underlying rating

SR.VIII

NC

• No comprehensive review of the adequacy of the relevant
laws in order to identify the risks and prevent the misuse of
NPOs for terrorism financing purposes.

• Lack of systematic outreach to the NPO sector.

• No comprehensive monitoring activities and inspections for
the whole NPO sector.

• No explicit legal requirement for the NPOs to maintain
business records for a period of at least five years.

• No formal mechanism established for national co-operation
and information exchange between the national agencies
which investigate ML/FT cases relating to NPOs.

• No formal mechanism established for responding to
international requests regarding NPOs.

177

6 NATIONAL AND INTERNATIONAL CO-OPERATION

6.1 National co-operation and co-ordination (R. 31 & R.32)

6.1.1 Description and analysis

Recommendation 31

1006. The policy-making bodies of the HS/VCS operate in a coordinated way to enforce rules and
measures generally and in the AML/CFT field in particular. As the Fundamental Law of the
Vatican City State of 2000 states, "in matters of major importance it shall be proceeded in
agreement with the Secretariat of State" (Art.6). Furthermore, the Act on the Government of the
Vatican City State No. CCCLXXXIV of 2002 provides that the activity of the organs of the
HS/VCS, in matters of common interest, shall be oriented towards the principles of functional
integration and co-operation. The Act states "the Directorates shall operate in co-operation and
concert, according to the principle of functional integration, in matters of common interest"
(Art.29.4). The authorities mentioned the fact that the work on AML/CFT legislation was
undertaken as a joint effort.

1007. The original AML/CFT Law stated that the FIA "supervises the observance of the duties
established in matters of prevention and countering of money laundering and financing of
terrorism and issues provisions for the implementation of the rules contained in this Act, except
for those contained in Chapters II and III (that is - criminal provisions of the Law); furthermore, it
has the power to issue guidelines and particular directives with reference to the subjects on which
the duties foreseen in this Act are imposed". However, it appears that the co-ordination of the
activities of the Promoter of Justice, the FIA and the Gendarmerie Corps has so far been limited to
the exchange of information. The MOU on the exchange of information regarding the co-
operation between these bodies is still in draft form. The FIA is obliged to communicate to the
Promoter of Justice of the HS/VCS the information that "on the basis of the known features, size,
nature and circumstances whatsoever, integrate possible model cases of money laundering, self-
laundering or financing of terrorism" (Art.33.3 amended law Art. 2 septies.2.3.c and Art. 36
bis.l.d with a slightly revised wording). The FIA, when it proceeds to the suspension of
transactions suspected of money laundering or financing of terrorism, is obliged to "immediately
report it to the Promoter of Justice" (Art.33.5 (k) the amended law in Art. 2 septies.3.h requires
the FIA to report the suspensions to the Judicial Authorities). The Promoter of Justice of the
HS/VCS, in his turn, in order to guarantee an adequate verification of the cases, is obliged to
communicate to the FIA "the reports of suspicious transactions not subjected to further
investigation" (Art.36, the amended law Art. 36 bis.T).

1008. According to the Act on the Government of the Vatican City State, (Art.13.3) "the Gendarmerie
Corps operates jointly with the judicial organs and the competent authorities of the Holy See". So,
in the AML/CFT field the Gendarmerie Corps operates in co-operation with the Promoter of
Justice and the FIA.

1009. The revised AML/CFT Law introduced new Art. 2 quinquies that states that "the Secretariat of
State is responsible for the definition of the policies for the prevention and countering of money
laundering and the financing of terrorism. In those sectors, it promotes co-operation among the
various authorities of the Holy See and the State competent on the prevention and countering of
money laundering and the financing of terrorism". It therefore appears that the amended law has
given the Secretariat of State the coordinating function. In addition to that a new "player" was
introduced by Art. 2 sexies of the revised AML/CFT Law which makes the Pontifical
Commission of the Vatican City State responsible for the adoption of general regulations for the
implementation of the AML/CFT Law.

178

1010. To date, no formal mechanism has been established to enable competent authorities to
cooperate and coordinate their actions in the AML/CFT sphere. Furthermore, there has been no
collective review of the AML/CFT system and its performance which would have set the basis for
future developments and implementation of policies and activities to combat money laundering
and terrorist financing. The impact of the implementation of the new role of the Secretariat of
State as a coordinating body remains to be seen, due to the novelty of the provision.

Additional Elements

1011. Art. 33.5(g) of the original AML/CFT Law stated that the FIA "prepares, after hearing the
obliged subjects, programs of training of the personnel to let them be aware with the law into
force and the activities that could be connected with money laundering or financing of terrorism".
This is not a provision for co-operation per se but could mean that some form of consultation
mechanism could be established on this basis to further focus on consulting obliged parties before
the development of new measures. Unfortunately that provision disappeared in the revised
AML/CFT Law and the FIA can now only follow the relevant policies and procedures adopted by
the reporting entities themselves.

Effectiveness and efficiency

1012. The small size of HS/VCS and of the institutions involved, as well as the existing close
relationship between the competent players involved in this process, needs to be taken into
consideration when assessing domestic co-operation.

Recommendation 32

1013. The following chart sets out details of the information exchange between the FIA and the
other bodies within the HS/VCS from 1 April 2011 (the date that the FIA became operational and
31 December 2011.

Exchange of information and meetings

Exchange of information

2 between the FIA and the
Gendarmerie

4 between the FIA and the
Prefecture for Economic Affairs

Meetings

3 between the FIA and the
Gendarmerie

2 between the FIA and the
Prefecture for Economic Affairs

1014. The following chart sets out details of the information exchange between the Gendarmerie and
the General Inspectorate of Public Security for the Vatican City.

Exchange of Information between the Gendarmerie and the General
Inspectorate of Public Security for the Vatican City

YEAR

Number of Contacts

2009

74

2010

73

179

2011

93

Recommendation 30 (Resources - Policy makers)

1015. The resources of the policy makers are adequate and enable them to fully perform their
functions.

6.1.2

Recommendations and Comments

1016. The authorities should consider creating a formal mechanism for co-operation and co-
ordination of their actions in the AML/CFT sphere. The MOU mechanism could be used for this
purpose. In addition, there should be a collective review of the AML/CFT system and its
performance which would have enable the authorities to set the basis for future developments and
implementation of policies and activities to combat money laundering and terrorist financing.

6.1.3

Compliance with Recommendation 3 1

Rating

Summary of factors underlying rating

R.31

LC

• No formal mechanisms for co-operation and co-ordination or MOUs
have been established or signed.

• The effectiveness of the new amendments in the law on coordinating
mechanisms is yet to be seen.

6.2 The Conventions and United Nations Special Resolutions (R. 35 and SR.I)

6.2.1

Description and analysis

1017. Both the Holy See and the Vatican City State enjoy international legal personality. Under Art.
2 of the Lateran Treaty of 1929 "Italy recognises the sovereignty of the Holy See in the
international realm as an attribute inherent in its nature in conformity with its tradition and with
the requirements of its mission to the world".

1018. The HS maintains bilateral diplomatic relations with a substantial number of members of the
international community. It is a member of certain international organisations and enjoys observer
status in many others including the UN and the Council of Europe. It enjoys a treaty making
capacity in international law and has become a party to a number of multilateral conventions
including several negotiated under the auspices of the UN.

1019. In December 1988 the Holy See signed the UN Convention against Illicit Traffic in Narcotic
Drugs and Psychotropic Substances (the Vienna Convention) but had not, at the time of the on-
site visit in November 2011, ratified this instrument. As of the date of that MONEYVAL on-site
visit no steps had been taken towards becoming a party to the Palermo Convention or the 1999
UN International Convention for the Suppression of the Financing of Terrorism. The authorities
confirmed that there was no technical impediment to such participation.

1020. In the course of the visit the evaluation team was briefed on the issues of principle and
practicality which had minded the HS not to become formally bound by these significant
international instruments. While the evaluators very much appreciated the explanations afforded
for this policy stance they stressed that the relevant FATF standards (R.35 and SR.I) required
formal participation in these treaty regimes.

1021. It is of importance to note, however, that the HS/VCS had not ignored the important
underlying issues addressed by these treaties. Rather its focus, as noted in the earlier analysis of

180

R. 1 and SR.II, had been to concentrate on criminalisation of the offences set out in them and to
rely on the flexibility of domestic legal provisions to give effect to relevant international co-
operation. It will be recalled in this context that Act No. CXXVII of 30 December 2010 contained
several provisions inspired by the relevant UN Conventions including certain drugs, organised
crime and terrorist offences and, indeed, that on money laundering. While this strategy had the
effect of reducing the range of possible problems of a practical nature which would otherwise
flow from non-participation it did not eliminate them especially in so far as legal obligations to
provide various forms of co-operation was concerned. Nor did it address formal non-compliance
with the FATF standards in question.

1022. In the period immediately following the conclusion of the first evaluation visit in November
2011 the authorities saw fit to reconsider their policy concerning the three UN Conventions in
question. As a consequence of this review the necessary steps were taken in January 2012 (i.e.
within two months from the end of the MONEYVAL on-site mission) to become parties to the
Vienna, Palermo and Terrorist Financing Conventions of the UN and these are now in full force
and effect. The evaluators warmly welcome this important development.

1023. It should be stressed that in the legal system of the VCS international treaty obligations are
automatically incorporated. This flows from Art. 1(4) of the Act on the sources of law of 1
October 2008 (Annex XII) (see also, Canon 3). While implementing legislation is not formally
required officials of the Secretariat of State informed the evaluators that a Committee had been
formed to consider, inter alia, if there were specific areas in which legislation was nonetheless
desirable from a policy or a practical perspective.

1024. SR.I also requires countries to fully implement UN Security Council Resolutions relating to
the prevention and suppression of the financing of terrorism (although, as a non-member state of
the UN, the HS/VCS does not regard itself as being legally bound by the same). As was noted in
the analysis of SR.III above, Chapter IV of Act No. CXXVII of January 2012 is central to the
approach (voluntarily) adopted and is broadly in line with international expectations. However,
several practical steps, including the creation of a list of designated persons, were still required to
make the system operational.

Additional elements

1025. The HS/VCS has not become a party to the 1990 Council of Europe Convention on
laundering, search, seizure and confiscation of the proceeds from crime or its successor, the
Warsaw Convention of 2005. However, Art. 8(l)(b) of the Monetary Agreement of 17 December
2009 between the EU and the HS/VCS (See Annex XXXII) is of relevance in this context. By
virtue of that provision the HS/VCS undertakes to take all appropriate steps to adopt EU measures
relating to, inter alia, money laundering as listed in the Annex to the Agreement. Among these is
Council Framework Decision 2001/500/JHA of 26 June 2001 on money laundering, the
identification, tracing, freezing, seizing and confiscation of instrumentalities and the proceeds of
crime. It will be recalled that this Council Framework decision was based, in large measure, on
the fact that all EU Member States had subscribed - through full formal participation - to the
principles of the 1990 Convention. Similarly one of its primary purposes was to promote a high
degree of harmonisation of approach to Member State implementation of certain of its key
provisions. Compliance by the HS/VCS with the requirements of Art. 8(1 )(b) was due to be
achieved by 31 December 2010.

6.2.2 Recommendations and comments

1026. The HS/VCS should prioritise the effective implementation of Chapter IV of Act No.
CXXVII of January 2012 through the completion of the listing process and other means, as
necessary, to ensure full and effective implementation of UN Security Council Resolutions on the
financing of terrorism.

181

1027. Legislative measures should be taken to address the current deficiencies in the criminalisation
of terrorist financing as identified in the analysis of SR.II, and the system for implementing
UNSCR 1267 and 1373 need to be made operational.

6.2.3

Compliance with Recommendation 35 and Special Recommendation I

Rating

Summary of factors underlying rating

R.35

C

SR.I

PC

• Failure to bring the new system concerning UN Security Council
Resolutions into practical operation within the relevant period.

6.3 Mutual legal assistance (R. 36-38, SR.V)

6.3.1

Description and analysis

Recommendation 36

1028. In the HS/VCS issues of international legal co-operation are regulated by the relevant
provisions of the Italian Code of Criminal Procedure of 1913 as it stood in 1929 (CCP). This
flows, in turn, from Art. 8 of the Act No. LXXlon the Sources of Law of 1 October 2008 (see
Annex XII). Art. 635 of the CCP stipulates, in relevant part, that international conventions and
practices regarding letters rogatory and related matters are to be observed. However, at the time of
the November 2011 MONEYVAL on-site visit no bilateral mutual legal assistance agreements
had been concluded. Furthermore, the HS/VCS was not a participant in either the 1959 European
Convention on Mutual Assistance in Criminal Matters or of the 1990 Strasbourg or 2005 Warsaw
Conventions of the Council of Europe. However, following the change of policy described earlier,
the HS/VCS is now a party to the Vienna, Palermo and Terrorist Financing Conventions of the
UN. As such their extensive provisions relating to mutual legal assistance now apply as between
the HS/VCS and all other state parties.

1029. In the absence of an applicable treaty nexus Arts. 636-639 of the CCP apply (see Annex XV).
These set out, in relatively broad and flexible terms, a Letters Rogatory process. Such co-
operation is, however, based on international comity or courtesy and does not flow from the
discharge of an international legal obligation as such. Furthermore any countries which require a
treaty base for international co-operation of the kinds contemplated in R.36 will not be able to
avail themselves of this possibility save in respect of common participation in the three UN
Conventions mentioned above.

1030. The Letters Rogatory process applies to the following: "the summoning and examination of
witnesses or in general, for acts regarding the preliminary judicial investigation or for execution
of provisions in the acts concerning this preliminary investigation . ..." (See Arts. 636 and 637 of
the CCP). Requests are made to the Secretary of State through the diplomatic channel. Accepted
requests are then forwarded by the Secretariat of State to the competent authorities for a
determination concerning enforceability.

1031. A striking feature of the relevant provisions of the CCP is that they do not articulate specific
grounds for refusal. Thus, unlike the position concerning extradition (see below), there is no dual
criminality requirement - a conclusion confirmed on-site in discussions with the Promoter of
Justice and a representative of the judiciary. Similarly, bank secrecy, fiscal, and political offence

182

considerations are notably absent as specified grounds for refusal. It would thus appear that the
HS/VCS legal system is consistent with the expectations of criteria 36.2, 36.3 and 36.4 of the
FATF methodology.

1032. Given the wording of the relevant CCP Arts, outlined above and the nature of the preliminary
investigation phase to which they are tied, it would appear that the HS/VCS can assist in (a) the
production, search and seizure of information, documents, or evidence; (b) the taking of evidence
or statements; and (c) providing originals or copies of relevant documents and records as well as
other information and evidentiary items. It did not appear to the evaluation team that the
legislative scheme in question could apply, as such, to effecting service of judicial documents or
facilitating the voluntary appearance of persons in the requesting State. That said the team is not
aware of any legal provisions inhibiting such actions; a view subsequently confirmed by the
President of the Tribunal.

1033. Given the relative antiquity of the provisions of the CCP it is not surprising that there is no
focused coverage of co-operation in the identification, freezing, seizure or confiscation of assets
laundered or intended to be laundered, the proceeds of money laundering and assets used for or
intended to be used for terrorist financing, as well as instrumentalities of such offences, and assets
of corresponding value. In such circumstances the general articles on Letters of Rogatory are
reliant on the adequacy of other provisions of the CCP and HS/VCS legislation in these areas.
These matters are explored further below in the context of R.38.

1034. The evaluators were satisfied that the powers of the competent authorities required under
Recommendation 28 are also available for use in response to requests for mutual legal assistance.

1035. In the context of the enhanced criminal co-operation with Italy established by the Lateran
Treaty of 1929, and especially by virtue of Art. 22 thereof, a mechanism exists for determining on
an ad hoc basis the most appropriate venue for the prosecution of defendants. Given the
geographic and practical importance of that relationship a significant proportion of criminal cases
are, in effect, subject to possible consideration in this context. However, no formal consideration
appears to have been given to addressing this matter in the context of cases involving other
members of the international community. This would, it is understood, be addressed on an ad hoc
basis by the appropriate authorities of the HS/VCS.

Additional Elements

1036. In the law of the VCS direct requests from foreign judicial or law enforcement authorities for
the use of powers required under R.28 cannot be complied with by domestic VCS counterparts.
The Letters Rogatory process must be utilised.

Recommendation 37 (dual criminality relating to mutual legal assistance)

1037. As was noted above, the relevant provisions of the CCP do not subject the Letters Rogatory
process to a requirement of dual criminality. Criteria 37.1 and 37.2 are thus fully satisfied in the
context of mutual assistance.

Recommendation 38

1038. As noted previously, the HS/VCS has recently become a party to the Vienna and Palermo
Conventions. It is not a party to any other international agreements, bilateral or multilateral,
providing for assistance in the area of confiscation. In the latter context it is obliged to rely on the
Letters Rogatory provisions in the CCP. These were examined in the context of R.36 above and
are explicitly tied to the preliminary investigation phase. There are no specific provisions which
govern the freezing, seizure and confiscation of criminal proceedings at the request of a foreign
state.

183

1039. In the course of the analysis of R.3 it was seen that the CCP contains a range of provisions
which facilitate the taking of provisional measures in domestic cases. Such provisions are, by
virtue of Arts. 636-639, available for use in response to a Letters Rogatory request.

1040. Article 635 of the CCP, discussed above, also stipulates that international conventions and
practices regarding 'the legal effect of foreign convictions and other relations with foreign
authorities concerning the administration of criminal justice are to be observed'. Consequently
confiscation assistance can be provided on this basis where the request is made pursuant to the
provisions of any of the three recently ratified UN Conventions. At the time of the MONEYVAL
on-site visits the evaluators were informed that in the absence of such a treaty nexus the HS/VCS
authorities would not be in a position to submit to their courts, with a view to giving effect to it,
an order of confiscation issued by a requesting state in relation to proceeds, property or
instrumentalities. However, at the May 2012 pre-meeting the attention of the evaluators was
drawn to the facilitating provisions contained in Arts. 651 to 653 of the CCP. These specifically
address the effects of foreign guilty sentences. It is noted, in particular, that Art. 653 treats the
recognition of the civil effects of foreign penal convictions. Although these provisions are of
some antiquity and were drafted in an era prior to the emergence of modern confiscation
assistance they appear to form a basis on which cooperation could be afforded in a range of
relevant circumstances. These provisions are reproduced in Annex XV. The evaluators are not,
however, aware of any use of these provisions in practice.

1041. As was noted in relation to R.3, paragraph 6 of Art. 421 bis on money laundering recognises
the concept of property of corresponding value. The HS/VCS authorities confirmed that co-
operation on this basis could thus be provided to foreign countries.

1042. In the HS/VCS there are not presently in effect any arrangements for coordinating seizure or
confiscation actions with foreign countries. This would be done on an ad hoc basis as and when
necessary.

1043. Paragraph 7 of Art. 421 bis of the Criminal Code, inserted by Art. 3 of the January 2012 Law,
specifically contemplates the possibility of entering into international asset sharing agreements
though none have been concluded to date. In the absence of the same, confiscated criminal
proceeds are to be used for the charitable and religious works of the Roman Pontiff. A very
similar approach is adopted in relation to confiscation under Art. 138 bis (associations for terrorist
purposes or subversion) and Art. 138 ter (financing of terrorism) save that both anticipate that
some at least of the funds and other assets in question will be devoted to providing assistance to
the victims of terrorism and their families.

Additional Elements

1044. At present non criminal confiscation orders cannot be recognised or enforced by the HS/VCS.
Special Recommendation V

1045. Outside of the context of SR.III there are no specific provisions in the legal system of the
HS/VCS designed to facilitate international co-operation in the terrorist financing sphere. The
general system as described above in relation to R.36-38 thus applies equally to the situations
addressed by SR.V. The provisions of the Terrorist Financing Convention will however, apply to
requests made by states which are parties to it.

Effectiveness and efficiency

1046. In the course of its dialogue with the HS/VC,S the evaluation team was informed that, in the
period 2001-2010, the Secretariat of State had received approximately 20 Letters Rogatory
requests from a range of states, primarily in Europe and the Americas. It was also informed that
only one request was not executed. This flowed from the fact that the VCS Tribunal was
exercising jurisdiction over this case resulting from a death in VCS territory. On average the
authorities of the HS/VCS estimate that requests are answered within three months from the date
of receipt. Of the requests in question the evaluators were informed that one, in 2003, involved a

184

criminal case involving allegations of money laundering. In that instance the VCS Tribunal took
the testimony of numerous witnesses and collected relevant documents. The materials were then
transmitted to the USA and thereafter to the relevant Federal Court. The authorities of the
HS/VCS confirmed that none of the requests involved the provision of confiscation assistance.
The evaluators were further informed that at the end of the period relevant to this evaluation (25
January 2012) there were no pending requests awaiting execution. Finally the HS informed the
evaluators that it has also provided substantial diplomatic cooperation and information with
respect to criminal matters through its apostolic nuncios who enjoy the status of ambassadors
under the terms of the Vienna Convention on Diplomatic Relations. However, no specific
materials were provided to the team in this regard. While the above information reveals a broadly
satisfactory track record of cooperation one country indicated, in the course of the normal
consultation with MONEYVAL and FATF members, that it had encountered some difficulties in
the context of its mutual legal assistance relationship with the HS/VCS.

6.3.2

Recommendations and comments

1047. At present the HS/VCS must rely on the Letters Rogatory process provided for in Arts. 636-
639 of the Code of Criminal Procedure. This is drafted in relatively broad and flexible terms and
double criminality is not required. As noted above, this scheme of co-operation is generally
adequate in relation to the provision of assistance for money laundering, terrorist financing and
predicate offence investigations and prosecutions. As seen, Arts. 651-653 facilitate giving effect to
foreign convictions including the civil effects thereof. These will be of value in a range of
possible circumstances relating to confiscation.

1048. However, and unsurprisingly given their relative antiquity, these provisions do not directly
address the complexities associated with the tracing, freezing and seizure and confiscation of the
proceeds of money laundering, predicate offences, and terrorist finances or related
instrumentalities. Consideration should be given to enacting modern and detailed legislative
provisions in this sphere.

1049. Art. 635 of the CCP however stipulates that international conventions regarding inter alia,
both letters rogatory and the legal effect of foreign convictions and other relations with third
states in the criminal justice sphere are to be observed. As the mutual legal assistance and
confiscation co-operation provisions of both the Vienna and Palermo Conventions are highly
detailed the fact that the HS/VCS is now a party to these instruments goes some way towards
securing the availability of modern practice in these areas of concern.

1050. Currently, there are no mechanisms for determining the best venue for prosecution of
defendants in the interests of justice in cases that are subject to prosecution in more than one
country and the HS/VCS authorities are encouraged to develop a procedure to cover this
deficiency.

6.3.3

Compliance with Recommendations 36 to 38 and Special Recommendation V

Rating

Summary of factors underlying rating

R.36

LC

• No mechanisms for determining the best venue for prosecution of
defendants in the interests of justice in cases that are subject to
prosecution in more than one country other than Italy.

R.37

C

R.38

LC

• No action to implement criteria 38.3.

• Effectiveness concerns.

SR.V

LC

• No action to implement criteria 38.3

• Effectiveness concerns.

185

6.4 Extradition (R. 37, 39, SR.V)

6.4.1 Description and analysis

Recommendation 39

1051. In so far as extradition is concerned it is necessary to distinguish between two situations: a)
relations with Italy; and b) relations with other countries and territories.

1052. Under Art. 22 of the Lateran Treaty of 1929 the HS/VCS enjoys "an enhanced co-operation"
with Italy. The text is worded thus:

At the request of the Holy See, or by its delegation which may be given in individual cases
or permanently, Italy will provide within its territory for the punishment of crimes committed
within Vatican City, except when the author of the crime will have taken refuge in Italian
territory, in which event he will be certainly prosecuted according to the provision of Italian
laws.

The Holy See will hand over to the Italian State persons who may have taken refuge within
Vatican City and who have been accused of acts, committed within Italian territory, which
are considered to be criminal by the laws of both States.

The same provisions will apply in regard to persons accused of crimes who may have taken
refuge within the buildings declared to be immune in Art. 15 hereof, unless the persons in
charge of such buildings prefer to invite the Italian police agents to enter them in order to
arrest such persons.

1053. In the course of the MONEYVAL on-site visits the authorities confirmed that the operation of
this enhanced system was not automatic. For instance in the situation envisaged in paragraph 2 of
Art. 22 Italy would have to file a formal request for surrender with the Secretary of State through
the diplomatic channel. A judicial determination would follow before surrender could take place.
This would address, inter alia, the satisfaction of the requirement of double criminality.

1054. In the HS/VCS the issue of extradition is regulated primarily by the provisions of the Code of
Criminal Procedure. As noted earlier in this report, in the absence of a relevant subsequent
legislative enactment Art. 8 of the Act No. LXXI on the sources of law of 1 October 2008 (see
Annex XII) stipulates that it is the Italian Code of Criminal Procedure of 1913 as it existed in
1929, which governs. This is the case in regard to extradition.

1055. Under Art. 635 of the CCP the terms of relevant extradition treaties are to be observed. In the
absence of the same CCP provisions are to be applied. At the time of the visits made by the
evaluation team to the HS/VCS no bilateral extradition treaties were in operation. Similarly the
HS/VCS is not a party to the European Convention on Extradition of 1957 or of any other
multilateral extradition arrangements. However, as a party to the Vienna, Palermo and Terrorist
Financing Conventions their provisions on extradition (Arts. 6, 16 and 11 respectively) would
apply in relevant cases. Otherwise it is the CCP (and in particular Arts. 640-650 thereof) which
applies.

1056. Notwithstanding its relative antiquity the extradition scheme provided for in the CCP it
appears to be broadly adequate for present purposes. It is triggered by a request made through the
diplomatic channel and the courts play a decisive role in determining whether the relevant
requirements have been satisfied. The final determination is made by the executive branch of
government (Art. 648).

186

1057. While extradition is subject to the requirement of double criminality (Art. 641(2)) the CCP
does not establish either a list of extraditable offences or a set minimum threshold of punishment.
Money laundering is an extraditable offence by virtue of its criminalisation within the HS/VCS.

1058. By virtue of Art. 9 of the Italian Criminal Code of 1888 which applies within the HS/VCS by
virtue of Art. 7 of the Act on the sources of law of 1 October 2008 (No. LXXI) extradition "is not
permitted for political crimes, nor any related offences". Art. 641(3) of the CCP is to a similar
effect. It will be recalled that Art. 3(10) of the 1988 Vienna Convention was designed, inter alia,
to limit the possibility that the political offence exception could be raised as a bar to extradition in
drug money laundering cases. This now applies to the HS/VCS.

1059. Art. 9 of the CC also stipulates that "[t]he extradition of a citizen is not permitted". Art. 641(1)
of the CCP is to the same effect. In such cases reliance must be placed on Art. 5 of the CC which
embraces the nationality principle of criminal jurisdiction as envisaged by criterion 39.2(b).
However, in cases where the Vienna and Palermo Conventions are relevant the extradite or
prosecute provisions of these instruments also apply (see Arts. 6(9) and 16(10) respectively.

1060. In the HS/VCS the ability to cooperate on procedural and evidentiary aspects of prosecutions
of HS/VCS citizens accused of extraterritorial offences for which extradition is not permissible
are regulated by the provisions of the CCP dealing with letters rogatory (Arts. 636-639). These
were discussed above.

1061. The extremely small size of the HS/VCS and the nature of its judicial system both lend
themselves, at least in the abstract, to allowing extradition requests and proceedings relating to
money laundering to be handled without undue delay. Certain provisions of the CCP also
encourage timely and effective decision making in this context. In particular, under Art. 647
appeals must be filed within one day of the decision and the matter must be determined by the
relevant judicial body within 10 days from receiving the appeal.

Recommendation 37 (dual criminality relating to extradition)

1062. As noted above, Art. 641(2) of the CCP subjects extradition to the satisfaction of the
requirement of double criminality. The wording used embraces this concept in abstracto
Consequently the requirement will be satisfied regardless of whether the HS/VCS and the country
concerned place the offence within the same category of offence or denominate it by the same
terminology, so long as the underlying conduct is criminalised in both jurisdictions.

Special Recommendation V

1063. As was seen in the analysis of SR.II, action has been taken to criminalise the core aspects of
the financing of terrorism as well as certain other terrorist acts. All such offences are extraditable
under the law of the HS/VCS. However, it was also noted that there remain certain deficiencies in
the approach of the existing legislation with respect to the complete satisfaction of existing
international standards. These deficiencies could have an adverse impact on the application of the
dual criminality requirement for extradition in relevant cases. It is also of relevance to note that
Art. 10 of the Terrorist Financing Convention includes a broad "extradite or prosecute"
obligation, which now applies to the VCS.

Recommendation 32

1064. Concerning extradition, it has been confirmed by the HS/VCS authorities that, in the course of
the last decade, the VCS has received no requests for extradition from third countries nor has it
submitted requests to third countries. By way of contrast, as is noted under section 1.5 b. above,
there is a continuing and not infrequent practice of surrender of violators from the VCS to Italy in
accordance with Art. 22 of the Lateran Treaty (see above).

187

Additional elements

1065. As was seen in the context of R.39 above, the HS/VCS shares an enhanced cooperative
arrangement with Italy in this sphere by virtue of the operation of Art. 22 of the Lateran Treaty of
1929. However, even here a formal request by Italy must be submitted through the diplomatic
channel.

1066. By virtue of Art. 644 of the CCP a simplified procedure exists for persons consenting to
extradition. It is crafted, in relevant part, thus:

If the request for extradition comes from the State of nationality of the arrested person, and
there is no other request for extradition by other States, the person under arrest assisted by his
defence lawyer, may request to be surrendered to the requesting government; in such case,
there is no judgement by the pre-trial chamber.

Effectiveness and efficiency

1067. The evaluators have noted the ongoing practice of surrender between the VCS and Italy
pursuant to the Lateran Treaty and are unaware of any significant issues in this context.
Notwithstanding the availability of extradition no requests were received in the course of the last
decade have emerged and they draw no negative inferences from this.

6.4.2

Recommendations and comments

1068. Extradition from the HS/VCS is subject to the satisfaction of the requirement of double
criminality. Deficiencies in the criminalisation of terrorist financing and other conduct, as
required by SR.II, and possibly in respect of some predicate offences, have the potential to have
an adverse impact on extradition in relevant cases. Such deficiencies should be addressed as a
matter of priority.

6.4.3

Compliance with Recommendation 37 & 39 and Special Recommendation V

Rating

Summary of factors underlying rating

R.37

LC

• Financing of terrorism insufficiently provided for so limiting the
possibilities for extradition (dual criminality).

R.39

LC

• Deficiencies in the criminalisation of financing of terrorism and some
predicate offences may limit the possibilities for extradition (dual
criminality).

SR.V

LC

• Deficiencies in the criminalisation of terrorist financing.

• Effectiveness concerns.

6.5 Other Forms of International Co-operation (R. 40 and SR.V)

188

6.5.1

Description and analysis

Recommendation 40

1069. The legal systems of the HS/VCS do not contain any undue restrictions to law enforcement
co-operation in fiscal issues or matters. Moreover, the legal system of the HS/VCS does not
contain any particular restrictions or conditions on international co-operation on the basis of the
protection of the financial secrecy and professional privilege of possible designated non-financial
subjects. Competent authorities are endowed with powers to carry out inquiries on both the
internal and international levels. In particular, the Gendarmerie Corps, in close co-operation with
the Judicial Authority, carries out inquiries and investigations and cooperates with authorities of
other states within the framework of INTERPOL. Furthermore, taking into account the Lateran
Treaty, it can request, through the competent channels, the co-operation of the equivalent Italian
agencies. As far as the latter aspect is concerned, the relations between the Gendarmerie and the
Italian Police take place through the General Inspectorate of Public Security for the Vatican City
(an Italian state institution which acts as a liaison body) representing the liaison body between the
two bodies of the two countries.

1070. The following table provides details of co-operation between the HS/VCS and Italian
authorities from 1 April 2011 to 31 December 2011.

Cooperation with Italian authorities

Exchange of information

7 requests by the Italian FIU
7 answers by the FIA

Meetings

2 meetings between the FIA and Bank of
Italy (including both the supervisory body
and the FIU)

1 Meeting between the FIA and the Italian
Customs authorities

2 meetings between the FIA and the Italian
Ministry of Economy and Finance

1071. The original AML/CFT Law mandated the FIA to maintain relationships with international
organisations entitled to define policies and standards in matters of prevention and countering ML
and FT (Art.33.5 (1)). The revised AML/CFT Law does not exclude this provision although it
vested the Secretariat of State with the authority for "relation with, and participation in, the
various international institutions and organisations competent for the definition of norms and best
practices regarding the prevention and countering of money laundering and the financing of
terrorism" (Art. 2 quinquies.T).

1072. The original AML/CFT Law contained a provision that the FIA "shall exchange information
under reciprocity agreements and, normally, on the basis of memoranda of understanding, in
matters of suspicious operations and cooperate with the Authorities of foreign States pursuing the
same goals of prevention and countering of money laundering and financing of terrorism" (Art.
41.1). Now, according to Art. 41.1, "the Financial Intelligence Authority exchanges information
regarding suspicious transactions in matters of money laundering and the financing of terrorism
with analogous Authorities in other States, on the condition of reciprocity and on the basis of
Memoranda of Understanding". The new wording made mandatory the existence of an MOU
before any exchange of information can be effected. However, at present, no MOUs have been
concluded.

189

1073. Art. 41.2 of the revised AML/CFT Law states "Secrecy and restrictions to the report of
classified information stemming from contract obligations or legislative, regulatory or
administrative provisions, shall not hinder the performance of the duties of international exchange
of information". The amended law confirmed this in a slightly different wording without changing
the substance.

1074. The evaluators were provided with conflicting opinions regarding the ability of the FIA to
share information concerning events prior to the date of entry of the AML/CFT Law which came
into force on 1 April 2011. On one view, the evaluators were advised that the law has no
retroactive effect; and on another view, the 1 April 2011 does not mark a date of limitation prior
to which financial information may not be accessed for the purposes of engaging in cooperation
with counterpart FIUs. It was subsequently clearly demonstrated to the evaluators that the FIA
had on a number of occasions received details of transactions and other information relating to the
period prior to 1 April 2011. Furthermore, it was demonstrated to the evaluators that this
information had been disseminated to the FIA's foreign counterparts. The evaluators have,
therefore come to the conclusion that there is no restriction on the ability of the FIA to receive or
disseminate information relating to transactions prior to 1 April 201 1.

1075. The gateways to facilitate and allow prompt and constructive exchanges of information
directly between counterparts for police co-operation are the INTERPOL channels. Vatican City
State joined the International Criminal Police Organisation (INTERPOL) in October 2008. There
is an officer responsible for relations with INTERPOL. The Gendarmerie can conduct inquiries on
behalf of foreign counterparts only upon an order of the judicial authority.

1076. Art. 2 octies §3 of the revised AML/CFT Law says that "with the nulla osta of the Secretariat
of State, the Gendarmerie may conclude Memoranda of Understanding with similar authorities
from other States to prevent and counter criminal activities, money laundering, and the financing
of terrorism". The AML/CFT Law does not seem to make the existence of an MOU mandatory in
the case of the Gendarmerie. Furthermore, as far as inquiries are concerned, it is noted that the
activity of the Gendarmerie Corp within the framework of INTERPOL facilitates contacts with
the authorities of states and the exchange of information. It thus appears that there is an
inconsistency in that the Gendarmerie can co-operate without the necessity of an MoU whereas
this is mandatory for the FIA.

1077. The HS/VCS authorities consider that information, which is consistent with the fundamental
principles and rules of the internal legal system, may be exchanged both spontaneously and upon
justified requests, and which should be adequately examined and on a timely basis.

1078. There are no formal or express provisions authorising the FIA to make inquiries on behalf of
foreign counterparts which may include searching its own databases (including with respect to
information related to suspicious transaction reports), searching other databases to which it may
have direct or indirect access, including law enforcement databases, public databases,
administrative databases and commercially available databases. This issue might be resolved if
the text of future MOUs contain the relevant provisions.

1079. The Gendarmerie is the only body formally entitled to carry out enquiries on behalf of foreign
counterparts. There are no other provisions in the law of HS/VCS for other authorities to carry out
enquiries on behalf of foreign counterparts.

1080. Co-operation and information exchange is not subject to restrictions or conditions apart from
such limitations as are determined by law solely for the purpose of securing due recognition and
respect for morality, public order and the general welfare as well fundamental human rights.

1081. The legal system of the HS/VCS does not set out any restrictions on law enforcement co-
operation in fiscal matters.

1082. There are no constraints, restrictions or conditions on international co-operation on the basis
of the protection of bank (or financial) secrecy or professional privilege of possible designated

190

non-financial subjects. Art. 41 §2 of the revised AML/CFT Law states "Financial secrecy and any
eventual restrictions on the communications shall not inhibit the international exchange of
intelligence".

1083. The officers of the competent authorities are subjected to the discipline of the General
Regulation of the Roman Curia of 1999. According to Art. 36, "all are obliged to rigorously
observe the rule of classified information. As a consequence, they cannot give, to those who are
not entitled to this, information relevant to deeds or news they learned because of their work".

1084. Furthermore, as regards the prevention and countering of the laundering of proceeds from
criminal activities and financing of terrorism, the revised AML/CFT Law provides for rules aimed
to guarantee the correct use of information and the protection of the right to privacy of the natural
and legal persons concerned. Art. 40 provides that: "all information held by the competent
authorities shall be subject to official secrecy, without prejudice to the activities of the Judicial
Authorities in case of criminal proceedings... all data, information and documents held by the
competent authorities shall be preserved using systems that ensure their security and integrity".

1085. Furthermore Art. 37 §3 of the revised AML/CFT Law states "The Promoter of Justice, the
Financial Intelligence Authority, and the Gendarmerie shall conclude Memoranda of
Understanding to ensure that their exchanges of information are secure and the utmost
confidentiality is given to identity of the persons who make the reports".

Supervisory Co-operation

1086. There are no provisions that allow for the passing or exchange of information to overseas
supervisors. However, the impact of this deficiency is limited by the fact that neither of the two
financial institutions, IOR and APSA, possess any overseas branches. Moreover, due to the
existence of the public monopoly regime, as described under section 5.1 above, no independent
financial institutions are established within the HS/VCS.

Additional elements

1087. So far as exchange of information with non-counterparts is concerned, the FIA cannot
cooperate in such manner as the law directly provides for the exchange of information with
agencies with the same functions.

Special Recommendation V

1088. The same problems identified above in relation to exchange of information apply to financing
of terrorism.

Additional elements

1089. The same approach has been adopted regarding the exchange of information on the financing
of terrorism as on money laundering (see above).

Recommendation 32 (Statistics - other requests made or received by the FIU, spontaneous
referrals, requests made or received by supervisors)

1090. No statistics on relevant international co-operation under Recommendation 40 were provided
to the evaluation team. The law enforcement agencies do not maintain special statistics on this
subject.

191

Additional elements

1091. The statistics provided by the Gendarmerie on international cooperation were not related to
money laundering or terrorism financing but were of a general character.

Effectiveness and efficiency

1092. The FIA is limited in its ability to exchange information by existence of an MOU and no

MOUs have been signed

86

6.5.2

Recommendation and comments

1093. There is no information as to how quickly the FIU would be able to respond to requests. The
FIA should quickly conclude MOUs with at least FIUs from those countries with which it will
most likely need to exchange information. The FIA and the Gendarmerie should keep detailed
statistical data showing in particular their response times and whether the requests were fulfilled
in whole or in part or were incapable of being fulfilled. It is also advised that statistical
information is kept in relation to the numbers and types of spontaneous disclosures made by the
FIA.

1094. The law should be amended to specifically allow for the exchange of supervisory information.
6.5.3 Compliance with Recommendation 40 and SR.V

Rating

Summary of factors underlying rating

R.40

PC

• The FIA does not have the explicit authority to share supervisory
information.

• The FIA is limited in its ability to exchange information by existence of
an MOU and no MOUs have been signed (effectiveness issue).

SR.V

PC

• The same problems identified in R.40 in relation to exchange of
information apply to financing of terrorism.

The authorities have subsequently reported that they have entered into one MoU with an FIU. In addition they
have approached 1 1 other FIUs receiving formal assent from two.

192

OTHER ISSUES

7.1

Resources and Statistics

Recommendations 30 and 32

1095. The text of the description, analysis and Recommendations for improvement that relate to
Recommendations 30 and 32 is contained in all the relevant Sections of the report i.e. all of
Section 2, parts of Sections 3 and 4, and in Section 6. There is a single rating for each of these
Recommendations, even though the Recommendations are addressed in several Sections. Section
7.1 of the report contains only the box showing the ratings and the factors underlying the rating.

Rating

Summary of factors underlying rating

R.30

PC

• Lack of training and experience in financial investigation for the
Gendarmerie.

• The structure of the FIA does not reflect division between the FIA as
Supervisor or the FIA as FIU. There is also no real division in staff for
the two different tasks.

• No specific training was provided for the supervisory tasks.

• Status of the Statue of the FIA is unclear while it refers to the old law.
Although it gives the Board the task to define the strategy it has
according to the new law only operational independence.

R.32

LC

• No statistics concerning the application and effectiveness of the
supervisory measures taken.

7.2

Other Relevant AML/CFT Measures or Issues

193

IV. TABLES

Table 1: Ratings of Compliance with FATF Recommendations
Table 2: Recommended Action Plan to improve the AML/CFT system

8 TABLE 1. RATINGS

RECOMMENDATIONS

OF COMPLIANCE WITH FATF

Forty Recommendations

Rating

Summary of factors underlying rating 87

Legal systems

1 . Money laundering offence

LC

• Effectiveness concerns.

2. Money laundering offence
Mental element and
corporate liability

LC

• The evaluators have concerns regarding the
effectiveness of the corporate liability provisions.

3. Confiscation and provisional
measures

LC

• Lack of comprehensive authority to prevent or void
actions (c.3.6).

• Effectiveness concerns.

Preventive measures

4. Secrecy laws consistent with
the Recommendations

LC

• While in practice information covered by financial
secrecy appears to be exchanged with foreign
financial institutions where this is required to
implement FATF Recommendations, there is no
express exemption from the obligation to observe
financial secrecy with respect to such information
exchange and could therefore be challenged before
the court.

• Given that there is no clear empowerment for FIA
to exchange information with foreign supervisory
authorities, it remains unclear whether official
secrecy could inhibit the information exchange with
other foreign supervisors.

5. Customer due diligence

PC

• No requirement to verify that the transactions are
consistent with the institution's knowledge of the
source of funds, if necessary.

• Failure to have undertaken any formal risk
assessment implies that there is no basis for
determining whether potential risks are addressed

These factors are only required to be set out when the rating is less than Compliant.

194

•

appropriately by the current risk based approach in
place.

Rather than providing for simplified due diligence
measures, the AML/CFT Law creates blanket
exemptions from the CDD requirements.

The AML/CFT Law allows for simplified CDD
measures even where higher risk scenarios apply.

• Where obliged subjects are permitted to apply
simplified or reduced CDD measures to customers
resident in another country, this is not always
limited to countries that the HS/VCS is satisfied
are in compliance with and have effectively
implemented the FATF Recommendations.

• The FIA Instruction allows for the verification of
the identity of the customer and beneficial owner
following the establishment of the business
relationship without all conditions mentioned under
criterion 5.14 being met cumulatively.

• The definition of "linked transactions" is not in line
with the Standard, which does not provide for a
limitation in respect of the time elapsing between
transactions.

Effectiveness

•

The following requirements have been introduced
or clarified too recently to be considered fully

effective 88 :

•

•

•

The requirement to undertake CDD measures
when carrying out occasional transactions that
are wire transfers in the circumstances covered
by the Interpretative Note to SR VII.

The requirement to verify that any person
purporting to act on behalf of the customer is
so authorised, and to identify and verify the
identity of that person.

The requirement to verify the legal status of the
legal person or legal arrangement as required
by the Standard.

The clarification of the requirement to verify
the identity of the beneficial owner as required
by the Standard.

The requirement to understand the ownership
and control structure of the customer.

The requirement to perform scrutiny of

88

However, it has to be taken into account, that some of those requirements had been incorporated earlier in the

IOR internal procedures.

195

transactions undertaken.

• The requirement to apply CDD requirements to
existing customers on the basis of materiality
and risk and to CDD on such existing
relationships at appropriate times.

• The requirement to examine the need to report
an STR in situations where no relationship was
established following failure to satisfactorily
complete CDD.

• Further effectiveness concerns with respect to some
criteria (see shortcomings identified under
"Effectiveness and efficiency").

6. Politically exposed persons

PC

• The requirement to put in place appropriate risk
management systems to determine whether the
counterpart is a politically exposed person does not
extend to the case of the beneficial owner.

• Beyond the requirement to establish the source of
funds of customers and beneficial owners identified
as PEPs there is no express requirement to establish
the source of their wealth.

Effectiveness

• The following requirements have been introduced
or clarified too recently to be considered fully
effective:

• the requirement to apply PEP requirements
irrespective of the residence.

• the requirement to obtain senior management
approval, where a customer has been accepted
and the customer or beneficial owner is
subsequently found to be, or subsequently
becomes a PEP.

• the requirement to determine a PEP in all
instances, irrespective of "risky situations".

7. Correspondent banking

LC

• No express requirement to assess whether a
correspondent body has been subject to a ML/TF
investigation or regulatory action nor to assess the
respondent institution's AML/CFT controls, and to
ascertain that they are adequate and effective.

8. New technologies and
non face-to-face business

PC

• Undue exemptions from the CDD requirements, in
particular with respect to ongoing monitoring (due
to Art. 31 §3 of the revised AML/CFT Law).

Effectiveness

• The following requirements have been introduced

196

or clarified too recently to be considered fully
effective:

• The requirement to have policies in place or
take such measures as may be needed to
prevent the misuse of technological
developments in ML or TF schemes.

• The measures to be applied to manage risks
related to non-face to face relationships were
not fully appropriate to do so.

9. Third parties and introducers

N/A

10. Record keeping

LC

Effectiveness

• The requirement to maintain records of the business
correspondence has been introduced too recently to
be considered fully effective.

• The lack of on-site inspections (including sample
testing) with respect to the implementation of
record keeping duties raises concerns. Furthermore,
APSA has no internal procedures in place with
regard to record-keeping obligations.

1 1 . Unusual transactions

PC

• No requirement to examine as far as possible the
background and purpose of complex, unusual large
transactions, or unusual patterns of transactions,
that have no apparent or visible economic or lawful
purpose and to set forth their findings in writing.

• No express requirement to keep such findings
available for competent authorities and auditors for
at least five years.

Effectiveness

• The requirement to pay special attention to all
complex, unusual large transactions, or unusual
patterns of transactions, that have no apparent or
visible economic or lawful purpose had not been
fully implemented at the time of the MONEYVAL
on-site visits.

12. DNFBP-R.5,6, 8-11

PC

• Requirement for notaries, lawyers, external
accountants and tax advisers as well as trust and
company service providers to undertake CDD
measures when establishing business relations is not
broad enough.

• Trust and company service providers are not subject
to CDD and record-keeping requirements with
respect to the creation, operation or management of
legal persons or arrangements and buying and

197

selling business entities.

• Shortcomings identified in the context of
Recommendations 5, 6, 8, 10 et 11 are also
applicable to DNFBP.

Effectiveness

• Lack of effective implementation of CDD and
record-keeping requirements in respect of
accountants providing services falling under the
scope of the AML/CFT Law.

13. Suspicious transaction
reporting

PC

• Attempted transactions not explicitly covered in the
reporting obligation.

• Reporting obligation is limited to "transactions"
rather than "funds".

• No reporting obligation covering funds suspected to
be linked or related to, or to be used for terrorism,
terrorist acts or by terrorist organisations.

• Deficiencies in the terrorist financing offence
formally limit the reporting obligation in respect of
those who finance terrorism.

• Effectiveness concerns.

14. Protection and no tipping-off

LC

• There is no provision that restricts disclosure of the
fact that a suspicious transaction has been identified
and that an STR is in the process of being
prepared/reported.

15. Internal controls,
compliance and audit

PC

• The right of the FIA to issue guidance is restricted.

• Neither the law nor guidance provide for timely
access by the AML/CFT compliance officer to
customer identification data and other CDD
information, transaction records, and other relevant
information.

• IOR has internal procedures but their effectiveness
could only partly be assessed (Effectiveness issue).

• Overall the requirements have been introduced or
clarified too recently to be considered fully
effective.

16. DNFBP-R.13-15&21

PC

• Weaknesses regarding reporting as described under
R 13 are also relevant for this Recommendation.

• While at the moment the VCS authorities held the
opinion that effectively there are no DNFBP
operating within their jurisdiction that fall under the
AML Law, the effectiveness of reporting to the FIA

198

in practice might be very low.

• The weaknesses as described under
Recommendation 15 regarding financial institutions
also apply for DNFBP.

• The weaknesses as described under
Recommendation 21, regarding giving special
attention to business relationships and transactions
with persons from or in countries which do not or
insufficiently apply the FATF Recommendations,
also apply for DNFBP.

17. Sanctions

NC

• The conditions of sufficient effective, proportionate
and dissuasive criminal, civil or administrative
sanctions are not fully met. In particular sanctions
are not applicable for ASPA as it is regarded as a
public authority.

• No specific sanctions are available for directors and
senior management.

• No power to withdraw, restrict or suspend a
financial institution's licence.

• No inspections have been executed by the FIA and
no disciplinary or administrative sanctions have
been effectively applied.

• No particular sanctions have been applied to
DNFBP.

• Overall the requirements have been introduced or
clarified too recently to be considered fully
effective.

18. Shell banks

LC

• There is no express requirement for financial
institutions to satisfy themselves that respondent
financial institutions in a foreign country do not
permit their accounts to be used by shell banks.

19. Other forms of reporting

NC

• HS/VCS has not considered the feasibility and
utility of implementing a system where obliged
subjects report all transactions in currency above a
fixed threshold to a national central agency with a
computerised data base.

20. Other DNFBP and secure
transaction techniques

C

21. Special attention for higher
risk countries

NC

• No requirement to give special attention to business
relationships and transactions with persons from or
in countries which do not or insufficiently apply the
FATF Recommendations.

199

• No requirement to examine transactions, the
background and purpose of such transactions, as far
as possible, and to keep written findings available,
if they have no apparent economic or visible lawful
purpose.

• No effective measures in place to ensure that
obliged subjects are advised of concerns about
weaknesses in the AML/CFT systems of other
countries.

• There is no empowerment to apply appropriate
counter-measures where countries continue not to
apply or insufficiently apply the FATF
Recommendations.

22. Foreign branches and
subsidiaries

LC

• No requirement to pay particular attention
concerning whether the AML/CFT measures are
consistent with the home country requirements and
the FATF Recommendations are observed with
respect to branches and subsidiaries in countries,
which do not or insufficiently apply the FATF
Recommendations.

23. Regulation, supervision and
monitoring

NC

• Lack of clarity on the role, responsibility, authority
and independence of the FIA as supervisor.

• Directors and senior management of IOR and
APSA are not specifically evaluated on the basis of
"fit and proper" criteria by the FIA.

• IOR and APSA as such are "licensed" via the
Chirograph and the Pastor Bonus respectively but
are not by the FIA.

• No inspections have been undertaken of the
AML/CFT program of financial institutions; no
standard manual is available; no cycle of visits has
been determined or planned for; and no feedback
provided to IOR.

24. DNFBP - Regulation,

supervision and monitoring

NC

• The weaknesses regarding the power of the FIA to
apply sanctions as described under R 17 also has its
effect under this Recommendation.

• The weaknesses as described regarding the powers
of the FIA to perform inspections and what rights
they exactly entail as described under R 29 and R
23 also have an effect under this Recommendation.

• Supervision or monitoring of DNFBP has not taken
place.

25. Guidelines and Feedback

PC

• Regulations and Instructions not yet updated to
reflect amendments to the AML/CFT Law.

200

• Failure to provide further requested explanations on
the issued guidelines or feedback on the internal
procedures that were sent to the FIA.

• No specific guidance has been provided for DNFBP
operating for entities within HS/VCS.

• Effectiveness issues arise as the guidance is harder
to understand in certain cases as several articles
have been changed considerably.

• Effectiveness issues arise as the requirements have
been introduced or clarified too recently to allow
their application to be fully assessed.

Institutional and other
measures

26. TheFIU

LC

• Power to query additional information does not
appear to extend to all entities subject to the
reporting obligation.

• Effectiveness considerations:

• No access to information held by HS
foundations.

• Recent adoption of AML/CFT Law meant that
it was not possible to assess effectiveness of
implementation.

27. Law enforcement authorities

LC

• Effectiveness not demonstrated.

• Lack of experience and training in financial
investigations (effectiveness issue).

28. Powers of competent
authorities

C

29. Supervisors

NC

• Definition of inspection appears to be limited to
certain activities.

• Both under the old and the new law it is unclear to
what extent inspections include the review of
policies, procedures, books and records, and should
extend to sample testing.

• No specific power for the FIA to have direct access,
to the financial, administrative, investigative and
judicial information, required to perform its tasks in
countering money laundering and financing of
terrorism.

• Unclear if the legal empowerment of the
supervisory authorities includes the right of entry
into the premises of institutions under supervision,

201

the right to demand books of accounts and other
information, the right to make and take copies of
documents with a penalty on the institution if its
officers fail to comply.

• Power to impose sanctions is arranged for in
general terms under Art. 42, without making the
link explicit. No explicit empowerment to sanction
directors or senior management.

• Conflict of interest on supervisory issues due to one
of the members of the Cardinals' Committee being
President of the FIA.

• No inspections have been undertaken by the FIA.

• Overall the requirements have been introduced or
clarified too recently to be considered fully
effective.

• Overall, as no inspections have been executed and
the Regulation is not available it is still unclear
what "operational independence" means and
whether the powers of the FIA as supervisor are
adequate (Effectiveness issue).

30. Resources, integrity and
training

PC

• Lack of training and experience in financial
investigation for the Gendarmerie.

• The structure of the FIA does not reflect division
between the FIA as Supervisor or the FIA as FIU.
There is also no real division in staff for the two
different tasks.

• No specific training was provided for the
supervisory tasks.

• Status of the Statue of the FIA is unclear while it
refers to the old law. Although it gives the Board
the task to define the strategy it has according to
the new law only operational independence.

3 1 . National co-operation

LC

• No formal mechanisms for co-operation and co-
ordination or MOUs have been established or
signed.

• The effectiveness of the new amendments in the
law on coordinating mechanisms is yet to be seen.

32. Statistics

LC

• No statistics concerning the application and
effectiveness of the supervisory measures taken.

33. Legal persons - beneficial
owners

N/A

202

34. Legal arrangements -
beneficial owners

N/A

International Co-operation

35. Conventions

C

36. Mutual legal assistance

(MLA)

LC

• No mechanisms for determining the best venue for
prosecution of defendants in the interests of justice
in cases that are subject to prosecution in more than
one country other than Italy.

37. Dual criminality

LC

• Financing of terrorism insufficiently provided for so
limiting the possibilities for extradition (dual
criminality).

38. MLA on confiscation and
freezing

LC

• No action to implement criteria 38.3.

• Effectiveness concerns.

39. Extradition

LC

• Deficiencies in the criminalisation of financing of
terrorism and some predicate offences may limit the
possibilities for extradition (dual criminality).

40. Other forms of co-operation

PC

• The FIA does not have the explicit authority to
share supervisory information.

• The FIA is limited in its ability to exchange
information by existence of an MOU and no MOUs
have been signed (effectiveness issue).

Nine Special Recommendations

SR.I Implement UN instruments

PC

• Failure to bring the new system concerning UN
Security Council Resolutions into practical
operation within the relevant period.

SR.II Criminalise terrorist
financing

LC

• Absence of specific criminalisation of financing in
respect of certain terrorist acts in the relevant UN
counter-terrorism conventions annexed to the
Terrorist Financing Convention.

• Financing of individual terrorists or terrorist
organisations for legitimate purposes not covered.

SR.III Freeze and confiscate
terrorist assets

NC

• No designations under UNSCR 1267 or 1373
within the evaluation period.

• Communication systems for designation were not
tested within the evaluation period.

• Lack of guidance for obligated entities.

203

• Lack of comprehensive coverage of delisting
procedures and exemption procedures.

• Lack of publicly known procedures for unfreezing
in a timely manner of the funds or other assets of
persons inadvertently affected by a freezing order.

• No procedures for authorising access to funds
frozen pursuant to UNSCR 1267 that have been
determined to be necessary for basic expenses.

• Recent adoption of AML/CFT Law meant that it
was not possible to assess effectiveness of
implementation.

SR.IV Suspicious transaction
reporting

PC

• Attempted transactions not explicitly covered in the
reporting obligation.

• No reporting obligation covering funds suspected to
be linked or related to, or to be used for terrorism,
terrorist acts or by terrorist organisations.

• Deficiencies in the terrorist financing offence
formally limit the reporting obligation in respect of
those who finance terrorism.

• Effectiveness concerns.

SR.V International co-operation

LC

• No action to implement criteria 38.3.

• Deficiencies in the criminalisation of terrorist
financing.

• The same problems identified in R.40 in relation to
exchange of information apply to financing of
terrorism.

• Effectiveness concerns.

SR.VI AML requirements for
money/value transfer
services

N/A

SR.VII Wire transfer rules

NC

• No explicit requirement in the Regulation that
ensures that non-routine transactions are not
batched where this would increase the risk of
money laundering.

• No effective risk-based procedures have been
required from beneficiary financial institutions for
identifying and handling wire transfers that are not
accompanied by complete originator information.

• The Regulation itself contains weaknesses
regarding the verification of identity and too broad
an interpretation of the concept of 'domestic

204

transfers'.

• APSA had no written internal procedures in place at
the time of the MONEYVAL on-site visits.

• The FIA has not inspected IOR and APSA yet in its
supervisory role. This does not give the impression
that there are measures in place to effectively
monitor the compliance.

• Overall the requirements have been introduced too
recently to be considered fully effective and the
evaluators were unable to assess the effectiveness
of implementation.

SR.VIII Non-profit organisations

NC

• No comprehensive review of the adequacy of the
relevant laws in order to identify the risks and
prevent the misuse of NPOs for terrorism financing
purposes.

• Lack of systematic outreach to the NPO sector.

• No comprehensive monitoring activities and
inspections for the whole NPO sector.

• No explicit legal requirement for the NPOs to
maintain business records for a period of at least
five years.

• No formal mechanism established for national co-
operation and information exchange between the
national agencies which investigate ML/FT cases
relating to NPOs.

• No formal mechanism established for responding to
international requests regarding NPOs.

SR.IX Cross Border declaration
and disclosure

PC

• The declaration requirement does not cover
shipment of currency through containerised cargo.

• Doubts on the ability of the Gendarmerie to restrain
currency where there is a suspicion of ML/FT as all
declarations have been made at financial
institutions.

• Restrictions on the ability of the FIA to exchange
information with counterparts on cross-border
transportation.

• The voluntary payment rule substantially reduces
the level of sanctions and may undermine the
deterrent scope of the sanction.

• It was not demonstrated that the relevant authorities
were provided with sufficient training to effectively
perform their functions (Effectiveness issue).

205

TABLE 2: RECOMMENDED ACTION PLAN TO IMPROVE THE
AML/CFT SYSTEM

AML/CFT System

Recommended Action (listed in order of priority)

1. General

No text required

2. Legal System and Related
Institutional Measures

2.1 Criminalisation of Money
Laundering (R. 1 & 2)

R.1

• Further consideration should be given to clarifying the
relationship between the money laundering offence (Arts.
1 (4) & (5) of the revised AML/CFT Law) and the
traditional receiving offence (Art. 421 of the Criminal
Code).

R.2

• Art. 42 bis of the revised AML/CFT Law on
administrative responsibility of legal persons being
contingent on the securing of a prior conviction of a
natural person should be reconsidered in the light of the
examiners' concerns and practical experience of its
functioning.

2.2 Criminalisation of Terrorist
Financing (SR.II)

• The terrorist acts set out in the Annex to the UN Terrorist
Financing Convention should be brought into the
Criminal Code.

• The Criminal Code should be amended to criminalise the
financing of terrorist organisations and individual
terrorists for legitimate purposes.

• Art. 42 bis of the revised AML/CFT Law on
administrative responsibility of legal persons being
contingent on the securing of a prior conviction of a
natural person should be reconsidered in the light of the
examiners' concerns and practical experience of its
functioning.

2.3 Confiscation, freezing and
seizing of proceeds of crime (R.3)

• A detailed, comprehensive and modern scheme to address
the range of issues described in the report should be
introduced.

• The Criminal Procedure Code should be amended quickly
to clarify the authority to take steps to prevent or void
actions, whether contractual or otherwise, where the
persons involved knew or should have known that as a
result of those actions the authorities would be prejudiced
in their ability to recover property subject to confiscation.

2.4 Freezing of funds used for

• The legislative framework should be brought into full

206

terrorist financing (SR.III)

force and effect as a matter of urgency.

• Art. 24 of the revised AML/CFT Law should be clarified
to place beyond doubt that it is intended to give effect to
"designations" made by the EU and other "international"
bodies and by third states.

• On the basis that Art. 24 is so intended, separate
procedures should be put in place to cover the so called
"EU internals" (which are not subject to designation as
such by the European Union).

• Guidance to obligated entities on the freezing of funds for
terrorist purposes should be finalised and circulated.

• Steps need to be taken to create a comprehensive and
effective system for delisting, exemptions and like
matters. This is particularly the case in respect to the
authorisation of access to funds needed for basic expenses
or for extraordinary expenses in accordance with Security
Council Resolutions 1452 (2002).

2.5 The Financial Intelligence Unit
and its functions (R.26)

• Expressly extend the power of enquiry of the FIA to the
information held by all entities subjected to the reporting
duty.

• Clarify to what additional sources the FIA has access and
to include explicitly the foundations located in and/or
dependent from the HS.

• Specify the instances triggering the authority and
intervention of the FIA, beside the receipt of SARs.

• reinforce the autonomy of the FIA by restoring its
decision power to conclude mutual co-operation
agreements with its counterparts.

• As an effectiveness consideration, strengthen the freezing
capacity of the FIA to include accounts and revisit the
obligation of immediate handover to the Promoter of
Justice.

2.6 Law enforcement, prosecution
and other competent authorities

(R.27&28)

• Intensify the training of the law enforcement authorities in
AML/CFT investigative tools, computer techniques and
financial investigation.

• Include the judiciary in such training to develop its own
expertise to deal with the legal challenges inherent in the
prosecution of ML/FT.

• Law enforcement should further interact and coordinate
with the FIA to develop the necessary investigative skills.

• Develop HS/VCS' own experience and jurisprudence in
stand-alone money laundering prosecutions, rather than
transferring cases to the Italian investigative authorities.

• Consider developing a joint committee to review and

207

evaluate the effectiveness of the AML/CFT system.

2.7 Cross Border Declaration &
Disclosure (SR.IX)

• Take stock of the sanctions applied and analyse whether
the voluntary settlement provisions undermine the
effectiveness of the sanctions.

• As necessary reconsider the statutory sanctions to ensure
that these are proportionate.

• Consider introduction of clearer law enforcement powers
to act on suspicion of money laundering or financing of
terrorism in Art. 39 of the revised AML/CFT Law.

• Review the existing legal provisions to facilitate more
effective Gendarmerie action in the restraint of suspect
currency.

3. Preventive Measures -
Financial Institutions

3.1 Risk of money laundering or
terrorist financing

HS/VCS authorities should undertake a formal and
comprehensive risk assessment and should in particular
review if the circumstances for simplified and enhanced
due diligence are appropriate for the local
environment/peculiarities.

3.2 Customer due diligence,
including enhanced or reduced
measures (R.5 to 8)

R.5

• The AML/CFT Law needs to be amended to specifically
require that financial institutions should verify that the
transactions are consistent with the institution's
knowledge of the source of funds, if necessary.

• Serious consideration should be given to a statutory
provision describing the types of legal and natural persons
eligible to maintain accounts in the IOR and APSA.

• Amend the exemptions for low-risk customers, products
and transactions as adopted from the Third EU AML
Directive by clarifying that minimum CDD (i.e. less
detailed CDD) should nevertheless be accomplished.

• Provide in the Law that simplified CDD measures are not
permissible where higher risk scenarios apply.

• Stipulate in the AML/CFT Law that simplified CDD
measures, with respect to credit or financial institutions
located in a State that observes equivalent AML/CFT
requirements, shall only be permissible where those
institutions are supervised for compliance with those
requirements.

• Simplified CDD measures should only be permissible if
listed companies are subject to regulatory disclosure
requirements.

• Amend FIA Instruction No. 2 to clarify that the
verification of the identity of the customer and beneficial

208

•

•

•

•

owner, following the establishment of the business
relationship, should only be permissible where all
conditions mentioned under criterion 5.14 are met
cumulatively.

Abolish the exemptions to CDD provided under Art. 31
§3 of the revised AML/CFT Law.

Where the Law allows for simplified or reduced CDD
measures to customers resident in another country,
HS/VCS authorities should limit this in all cases to
countries that the HS/VCS is satisfied are in compliance
with and have effectively implemented the FATF
Recommendations .

The FIA Instructions should be amended to require that
verification should occur as soon as possible in situations
where verification occurs after establishment of a business
relationship.

The provision that only transactions executed within a
period of seven days have to be considered as "linked
transactions" should be abolished.

Introduce an express requirement to verify that the
transactions are consistent with the institution's
knowledge of the source of funds where necessary.

R.6

• Extend the requirement to put in place appropriate risk
management systems to determine whether the
counterpart is a politically exposed person to the case of
the beneficial owner.

• Extend the requirement to establish the source of funds of
customers and beneficial owners identified as PEPS to
expressly include the establishment of their wealth.

R.7

• The AML/CFT Law should be amended to introduce an
express requirement to assess whether a correspondent
body has been subject to a ML/TF investigation or
regulatory action nor to assess the respondent institution's
AML/CFT controls, and to ascertain that they are
adequate and effective.

• Abolish the possibility to delegate the senior management
approval for establishing new business relationships with
a correspondent relationship.

R.8

• Eliminate the exemptions from CDD provided by Art. 3 1
§3 of the revised AML/CFT Law (in particular with
respect to ongoing monitoring).

R.5 to R.8 generally

209

• FIA should raise awareness with respect to the obligations
that have been introduced or clarified in the AML/CFT
Law after the MONEYVAL on-site visits to ensure
effective implementation.

• FIA should put in place appropriate arrangements to
monitor and ensure compliance with the requirements
under R. 5 to 8 (including adequate sample testing).

3.3 Third parties and introduced
business (R.9)

3.4 Financial institution secrecy or
confidentiality (R.4)

• Introduce an express exemption from the obligation to
observe financial secrecy with respect to the exchange of
information with foreign financial institutions where this
is required to implement FATF Recommendations.

• Clarify FIA's powers to request information as
recommended under R. 26 and R. 29 to ensure that
obliged subjects cannot refuse to comply with a request
for information based on the financial secrecy obligation.

• Clarify FIA's power to exchange information with foreign
supervisory authorities to make sure that official secrecy
cannot inhibit such information exchange.

• Consider adding the Judicial Authority to the list of all
competent authorities in Chapter I bis of the revised
AML/CFT Law in order to eradicate any potential doubts.

3.5 Record keeping and wire
transfer rules (R.10 & SR.VII)

R.10

• FIA should put in place appropriate arrangements to
monitor and ensure effective implementation of the
recordkeeping requirements (including adequate sample
testing).

• Adopt internal procedures clearly specifying the record
keeping duties and responsibilities of APSA staff.

SR.VII

• A clearer basis for requirements regarding the obligations
of payment service providers in the law (instead of in
guidance) should be established.

• An explicit requirement that ensures that non-routine
transactions are not batched where this would increase the
risk of money laundering should be established.

• Effective risk-based procedures for identifying and
handling wire transfers from beneficiary financial
institutions which are not accompanied by complete
originator information should be established for
beneficiary financial institutions.

• The FIA should apply its sanctioning powers where
breaches of regulations are uncovered.

210

• Art. 5 of Regulation 4 which obliges the payment service
provider of the payer to 'verify the completeness' of the
informative data before transferring the funds should be
extended to require that financial institutions should
verify the 'identity' of the originator as well.

• Art. 6 of Regulation 4 should be amended to limit the
exemption that domestic transfers include only the
originator's account number or a unique identifier to
domestic transactions within the HS/VCS.

• Full originator information in the message or payment
form accompanying the wire transfer should be required
for all other transactions.

• Art. 1 should be deleted and the Art. should apply only to
transactions where technical limitations prevent the full
originator information accompanying a cross-border wire
transfer from being transmitted with a related domestic
wire transfer.

3.6 Monitoring of transactions and
relationships (R.ll & 21)

R.11

• Introduce a requirement in Law, regulation or "other
enforceable means" to examine as far as possible the
background and purpose of complex, unusual large
transactions, or unusual patterns of transactions, that have
no apparent or visible economic or lawful purpose and to
set forth their findings in writing.

• Introduce a requirement in Law, regulation or "other
enforceable means" to keep such findings available for
competent authorities and auditors for at least five years.

R.21

• Introduce a requirement to give special attention to
business relationships and transactions with persons from
or in countries which do not or insufficiently apply the
FATF Recommendations.

• Introduce a requirement to examine transactions the
background and purpose of such transactions, as far as
possible, and to keep written findings available, if they
have no apparent economic or visible lawful purpose.

• Put in place effective measures to ensure that obliged
subjects are advised of concerns about weaknesses in the
AML/CFT systems of other countries.

• Introduce a clear empowerment to apply appropriate
counter-measures where countries continue not to apply
or insufficiently apply the FATF Recommendations.

3.7 Suspicious transaction reports
and other reporting (R. 13-14, 19, 25
& SR.IV)

R.13 & SR.IV

• Amend the AML/CFT Law to broaden the reporting
scope beyond the strict terrorism financing to bring it in

211

line with the standards.

• Amend the reporting requirement to require that a report
is submitted to the FIA when it is suspected or there are
reasonable grounds to suspect that "funds" (rather than
"transactions") are the proceeds of a criminal activity.

• Formally broaden the reporting duty beyond suspect
operations to include suspicions on funds generally.

• Remove any doubt about the reporting obligation
including attempted transactions.

• Remove any uncertainty as to the extent of the reporting
obligation of the financial institutions in respect of the
identification of the predicate offence.

• Emphasise the priority rule of the subjective assessment
of the suspicious nature of the funds, where the objective
indicators should only be seen as a guidance and support.

R.14

• Extend the tipping off prohibition to the fact that a STR
has been identified and is in the process of being
prepared/reported.

R.19

• Consider the feasibility and utility of implementing a
system where obliged subjects report all transactions in
currency above a fixed threshold to either the FIA or the
Gendarmerie.

R.25

• All existing guidance should be updated in accordance
with the revised AML/CFT Law.

• The FIA should provide active explanations of the issued
Regulations and Instructions to the financial sector.

• The FIA should provide appropriate feedback on the
internal procedures sent to the FIA by financial
institutions.

3.8 Internal controls, compliance,
audit and foreign branches (R.15 &

22)

R.15

Steps should be taken to ensure that all elements of
guidance given by the FIU are sanctionable or make sure
that relevant criteria are incorporated in the AML Law.

An explicit requirement for timely access to information
for the compliance officer, either in law or guidance
should be introduced.

R.22

Introduce a requirement to pay particular attention that
branches and subsidiaries in countries, which do not or

212

insufficiently apply the FATF Recommendations, observe
AML/CFT measures consistent with the home country
requirements and the FATF Recommendations.

Consider introducing a requirement for financial
institutions subject to the Basel Core Principles for
Banking Supervision (the IOR qualifies as such) to apply
consistent CDD measures at the group level, taking into
account the activity of the customer with the various
branches and majority owned subsidiaries worldwide.

3.9 Shell banks (R. 18)

Introduce an express requirement for financial institutions
to satisfy themselves that respondent financial institutions
in a foreign country do not permit their accounts to be
used by shell banks.

3.10 The supervisory and oversight
system - competent authorities and
SROs. Role, functions, duties and
powers (including sanctions) (R.23,
29, 17 & 25)

R.23

The definition of supervision and inspection should be
changed so that it is made clear what the powers, given to
the AML supervisor, encompass in practice.

Clarify in law or regulation the exact meaning of
"operational" as opposed to "full" independence of the
FIA as supervisor.

Introduce specific measures to involve the supervisor in
the process of licensing and approving of senior staff at
financial institutions.

Directors and senior management of IOR and APSA
should be specifically evaluated and 'licensed' on the
basis of "fit and proper" criteria including those relating
to expertise and integrity.

Give the FIA the power to assess 'fit and properness' on
an ongoing basis.

The FIA (or another body) should take up its supervisory
role on AML issues immediately, plan for (a schedule of)
inspections, set up a standard manual and work procedure
and provide for feedback proactively.

The FIA should start a supervisory inspection with IOR as
soon as possible.

Annual statistics on on-site inspections by the supervisor
or sanctions applied should be published. Reinstate the
requirement to draw up such statistics in the law.

IOR should subscribe to the Basel Core Principles for
Banking Supervision.

IOR should be supervised by a prudential supervisor in
the near future.

Clearly separate the task of supervision from the FIA as
FIU and combine this with adequate prudential

213

supervision, including:

(i) licensing and structure;

(ii) risk management processes to identify, measure,
monitor and control material risks;

(iii) ongoing supervision and

(iv) global consolidated supervision when required by
the Core Principles.

R.17

• Stipulate explicitly in law or guidance the full range of
FIA's powers of disciplinary sanction.

• Sanctions should encompass written warnings, orders to
comply with specific instructions accompanied with daily
fines for non-compliance, ordering regular reports, fines
for non compliance, barring individuals from employment
in the sector, replacing or restricting the powers of
managers, directors, imposing conservatorship, and at
least the ability to withdraw or suspend a licence.

• All sanctions levied should be published.

• Make explicit what the criminal sanctions are for natural
persons in cases of infringement of the several articles of
Act No. CXXVII relating to Chapters other than II and
III.

• Make explicit that sanctions can be applied to directors
and senior management of financial institutions.

R.25

All regulations and instructions should be amended to
reflect the revised AML/CFT Law (as they currently all
refer to the original AML/CFT Law and to articles that no
longer exist or have been changed considerably).

Give proactive explanations of the issued Regulations and
Instructions to the financial sector and provide feedback
on procedures sent to the supervisor by financial
institutions.

R.29

•

It is recommended that the definition of supervision and
inspection in the law is amended to make it clear that it is
not restricted to certain activities.

The Regulation of the Pontifical Committee should be
amended to clarify what is understood by monitoring,
verification and inspection. Ensure that it includes (also
via on-site inspections) the review of policies, procedures,
books and records, and sample testing.

The Regulation should make it clear how the change from

214

'full independence' to 'operational independence' in the
law applies and to what extent this effects the role and
tasks of the President and Board of Directors of the FIA.

• Reinstate Art 33, §2 of the original AML/CFT Law
(which gave the FIA direct access to the financial,
administrative, investigative and judicial information,
required to perform its tasks in countering money
laundering and financing of terrorism).

• Ensure supervisory authorities have the legal right of
entry into the premises of the institution under
supervision, the right to demand books of accounts and
other information and the right to make and take copies of
documents.

• Ensure sanctions can be imposed against financial
institutions, and their directors and senior management for
failure to comply with the powers given to the supervisor.

• The FIA should take up its supervisory role as soon as
possible.

• The President of the FIU should not be a member of the
Cardinal's Committee.

• clarity should be provided on the role of the Board of the
FIA in terms of identifying the supervision and
sanctioning strategy on the basis of the Statute given the
change towards "operational independence" in the new
law.

3.11 Money value transfer services
(SR.VI)

4. Preventive Measures - Non-
Financial Businesses and
Professions

4.1 Customer due diligence and
record-keeping (R.12)

• Clarify in law or regulation that notaries, lawyers,
accountants, external accounting and tax consultants as
well as trust and company service providers are also
required to undertake CDD measures when establishing
business relations.

• Set out in law, regulation or "other enforceable means"
that trust and company service providers are subject to
CDD and record-keeping requirements with respect to the
creation, operation or management of legal persons or
arrangements and buying and selling business entities.

• The recommended actions in Section 3 above with respect
to R 5, 6, 8, 10 and 11 should also be implemented for
DNFBP.

• Raise awareness amongst auditors and accounts with
respect to their CDD and record-keeping obligations

215

under the AML/CFT Law, provide training and put in
place appropriate arrangements to monitor and ensure
CDD and record-keeping compliance.

4.2 Suspicious transaction reporting
(R.16)

• The issues under Recommendations 13, 14, 15 and 21
should also be addressed for DNFBP.

4.3 Regulation, supervision and
monitoring (R.24-25)

• The FIA should issue a specific guideline for those
DNFBP that operate in the HS/VCS, in particular on how
they are to report to the FIA.

• The FIA should commence supervising the activities of
DNFBP.

4.4 Other non-financial businesses
and professions (R.20)

5. Legal Persons and
Arrangements & Non-Profit
Organisations

5.1 Legal Persons - Access to
beneficial ownership and control
information (R.33)

5.2 Legal Arrangements - Access to
beneficial ownership and control
information (R.34)

5.3 Non-profit organisations
(SR.VIII)

• Undertake a review the adequacy of domestic laws and
regulations that relate to all NPOs located within VCS
and conduct an assessment on the sector's potential
vulnerabilities to terrorist activities.

• The FIA should have its responsibilities extended to risk-
based monitoring of the NPO sector with necessary access
to relevant books and financial records.

• Develop guidance on the risks of terrorist abuse and the
available measures to protect against such abuse for all
NPOs which are located within VCS and then undertake
outreach to raise awareness within the sector.

• Legislation should:

a) Require NPOs to maintain and file records on the
purpose and objectives of their stated activities and
the identity of person(s) who own, control or direct
their activities, including senior officers, board
members and trustees;

b) Require NPOs to maintain, for a period of at least five
years, and make available to appropriate authorities,
records of domestic and international transactions that
are sufficiently detailed to verify that funds have been
spent in a manner consistent with the purpose and

216

objectives of the organisation; and

c) Sanction violations of oversight measures or rules by
NPOs or persons acting on behalf of NPOs.

• Legislation should develop provisions for the FIA and
Gendarmerie to have full access to information on the
administration and management of a particular NPO
(including financial and programmatic information)
during the course of an investigation.

• Formal procedures for national co-operation and
information exchange between the national agencies
which investigate ML/FT cases should be developed.

• An appropriate point of contact should be identified to
respond to international requests for information
regarding particular NPOs that are suspected of terrorist
financing or other forms of terrorist support. Procedures
should also be developed to process such requests.

6. National and International Co-
operation

6.1 National co-operation and co-
ordination (R.31)

• Consider creating a formal mechanism for co-operation
and co-ordination of their actions in the AML/CFT
sphere.

• There should be a collective review of the AML/CFT
system and its performance which would enable setting
the basis for future developments and implementation of
policies and activities to combat money laundering and
terrorist financing.

6.2 The Conventions and UN
Special Resolutions (R.35 & SR.I)

• Prioritise the effective implementation of Chapter IV of
Act No. CXXVII of January 2012 through the completion
of the listing process and other means, as necessary, to
ensure full and effective implementation of UN Security
Council Resolutions on the financing of terrorism.

• Legislative measures should be taken to address the
current deficiencies in the criminalisation of terrorist
financing as identified in the analysis of SR.II.

• The system for implementing UNSCR 1267 and 1373
needs to be made operational.

6.3 Mutual Legal Assistance (R.36-
38&SR.V)

• Consideration should be given to enacting modern and
detailed legislative provisions covering tracing, freezing
and seizure and confiscation of the proceeds of money
laundering, predicate offences, and terrorist finances or
related instrumentalities.

• Develop a procedure to cover mechanisms for
determining the best venue for prosecution of defendants
in the interests of justice in cases that are subject to
prosecution in more than one country.

217

6.4 Extradition (R.39, 37 & SR.V)

• Address the identified deficiencies in the criminalisation
of terrorist financing and other conduct, as required by
SR.II, to ensure that extradition is not inhibited.

6.5 Other Forms of Co-operation
(R.40 & SR.V)

• The FIA should quickly conclude MOUs with at least
FIUs from those countries with which it will most likely
need to exchange information.

• The law should be amended to specifically allow for the
exchange of supervisory information.

7. Other Issues

7.1 Resources and statistics (R. 30

&32)

R.30

• Ensure an adequate structure and staffing of the FIA to
reflect its supervisory role.

• Ensure that FIA staff receive appropriate training on the
supervisory aspect of their function.

R.32

• The FIA should draw up statistics concerning the
application and effectiveness of the measures taken; for
example, the annual statistics on on-site inspections by
the supervisor or sanctions applied.

• The FIA and the Gendarmerie should keep detailed
statistics showing in particular their response times and
whether the requests were fulfilled in whole or in part or
were incapable of being fulfilled.

• Statistics should also be kept in relation to the numbers
and types of spontaneous disclosures made by the FIA.

218

10 TABLE 3: AUTHORITIES' RESPONSE TO THE EVALUATION

The Holy See, acting also on behalf of Vatican City State, and coherently
with its nature and international personality, as well as its religious and
moral mission, entered the mutual evaluation procedures of the Council of
Europe's Committee of Experts on the Evaluation of Anti -Money
Laundering Measures and the Financing of Terrorism (MONEYVAL).

Under the guidance of the moral authority of His Holiness Pope Benedict
XVI, particularly as expressed in the Motu Proprio of 30 December, 2010,
the Holy See shares the commitment undertaken by the international
community to develop and implement global standards for the prevention
and countering of money laundering and financing of terrorism.

Reaffirming the principles of mutual respect and reciprocity, the Holy See
also expresses its appreciation for the objectivity of the mutual evaluation
procedures, the evaluators' acumen, and the active participation of the
Members of the MONEYVAL Plenary who, by consensus, adopted the
Mutual Evaluation Report.

Finally, the Holy See extends its assurance that the observations contained
in the Report will be given due and appropriate consideration in the efforts
to prevent and counter money laundering and the financing of terrorism, and
that it will continue to lend its voice to the eradication of these phenomena.

219

RD

V. COMPLIANCE WITH THE 3™ EU AML/CFT DIRECTIVE

The Holy See (including Vatican City State) is not a member country of the European Union. It
is not directly obliged to implement Directive 2005/60/EC of the European Parliament and of
the Council of 26 October 2005 on the prevention of the use of the financial system for the
purpose of money laundering and terrorist financing (hereinafter: "the Directive") and the
Commission Directive 2006/70/EC of 1 August 2006 laying down implementing measures for
Directive 2005/60/EC of the European Parliament and of the Council as regards the
definition of 'politically exposed person' and the technical criteria for simplified customer
due diligence procedures and for exemption on grounds of a financial activity conducted on
an occasional or very limited basis.

The following sections describe the major differences between the Directive and the relevant FATF
40 Recommendations plus 9 Special Recommendations.

1. Corporate Liability

Art. 39 of the Directive

Member States shall ensure that natural and legal persons covered by the
Directive can be held liable for infringements of the national provisions
adopted pursuant to this Directive.

FATF R. 2 and 17

Criminal liability for money laundering should extend to legal persons.
Where that is not possible (i.e. due to fundamental principles of domestic
law), civil or administrative liability should apply.

Key elements

The Directive provides no exception for corporate liability and
extends it beyond the ML offence even to infringements which are
based on national provisions adopted pursuant to the Directive. What is
the position in your jurisdiction?

Description and

Analysis

Art.42 of the revised AML/CFT Law of January 2012 creates a scheme
of administrative sanctions for violations, by natural and legal persons, of
a fairly comprehensive range of obligations imposed on obligated entities
under the Act. This extends to breaches of "related duties established by
the regulations and other enforceable measures adopted pursuant to this
law..."(§.l). The range of penalties, which differ for natural and legal
persons, appear to be potentially effective, proportionate and dissuasive.
As noted in the analysis of FATF Recommendation 2, this scheme of
administrative liability does not extend to money laundering and the
financing of terrorism as such. This dimension is addressed in Art.42 bis
entitled "administrative liability for legal persons" and has been
influenced in its drafting by Art.39 of the Directive. It is tightly drawn in
that it requires the prior conviction of a natural person before it can be
applied. This is not, however, inconsistent with the terms of the
Directive. Penalties to be applied are specified (§.1) as ranging from
€20,000 to €2,000,000.

Conclusion

The approach adopted to corporate liability is broadly consistent with the
requirements of the Directive.

Recommendations and
Comments

The evaluators have concerns as to the manner in which Art.42 bis has
been made contingent on securing a prior conviction of a natural person
for money laundering or terrorist financing. They urge the appropriate
authorities to revisit this issue in due course.

Anonymous accounts

Art. 6 of the Directive \ Member States shall prohibit their credit and financial institutions

220

from keeping anonymous accounts or anonymous passbooks.

FATF R. 5

Financial institutions should not keep anonymous accounts or
accounts in obviously fictitious names.

Key elements

Both prohibit anonymous accounts but allow numbered accounts.
The Directive allows accounts or passbooks on fictitious names
but always subject to full CDD measures. What is the position in your
jurisdiction regarding passbooks or accounts on fictitious names?

Description and
Analysis

Art. 1 bis letter a) of the revised AML/CFT Law prohibits to open or hold
anonymous or ciphered accounts, deposit, savings accounts or similar
relationships, or accounts under fantasy or fictitious names.

Conclusion

By also prohibiting passbooks and accounts on fictitious names the
AML/CFT Law is more stringent than the Directive and in line with
FATF R.5.

Recommendations and
Comments

None.

3. Threshold (CDD)

Art. 7 b) of the Directive

The institutions and persons covered by the Directive shall apply
CDD measures when carrying out occasional transactions amounting
to EUR 15,000 or more.

FATFR. 5

Financial institutions should undertake CDD measures when carrying
out occasional transactions above the applicable designated threshold.

Key elements

Are transactions and linked transactions of EUR 15,000 covered?

Description and
Analysis

Pursuant to Article 28 (b) of the revised AML/CFT Law the obliged
subjects shall fulfil CDD requirements when they carry out occasional
transactions equal to or in excess of €15,000, regardless of whether it is
conducted in a single transaction or in various transactions connected one
to the other.

However, pursuant to the definition provided in Art. 1 §28 of the
revised AML/CFT Law, only transactions conducted within a period of
seven days have to be considered as "linked transactions". This is not
in line with the Directive, which does not provide for such a
limitation of the time elapsed between transactions.

Conclusion

In line with the Directive, CDD measures have also to be applied for
transactions and linked transactions amounting to €15,000.

Recommendations and
Comments

Abolish the time limit of seven days for linked transactions provided
in Art. 1 §28 revised AML/CFT Law.

4. Beneficial Owner

Art. 3(6) of the Directive
(see Annex)

The definition of 'Beneficial Owner' establishes minimum criteria
(percentage shareholding) where a natural person is to be considered
as beneficial owner both in the case of legal persons and in the case of
legal arrangements

FATF R. 5 (Glossary)

'Beneficial Owner' refers to the natural person(s) who ultimately
owns or controls a customer and/or the person on whose behalf a
transaction is being conducted. It also incorporates those persons who
exercise ultimate effective control over a legal person or legal
arrangement.

Key elements

Which approach does your country follow in its definition of
"beneficial owner"? Please specify whether the criteria in the EU
definition of "beneficial owner" are covered in your legislation.

221

Description and
Analysis

The definition of "Beneficial Owner" contained in Art. 1 para 2 and 3 of
the Annex to the revised AML/CFT Law is almost a verbatim
implementation of the respective definition provided by Art 3 (6) of the
Directive

Conclusion

The criteria in the EU definition of "beneficial owner" are covered by
the AML/CFT Law.

Recommendations and
Comments

None.

5. Financial activity on occasional or very limited basis

Art. 2 (2) of the
Directive

Member States may decide that legal and natural persons who engage

in a financial activity on an occasional or very limited basis and

where there is little risk of money laundering or financing of terrorism

occurring do not fall within the scope of Art. 3(1) or (2) of the

Directive.

Art. 4 of Commission Directive 2006/70/EC further defines this

provision.

FATF R. concerning
financial institutions

When a financial activity is carried out by a person or entity on an
occasional or very limited basis (having regard to quantitative and
absolute criteria) such that there is little risk of money laundering
activity occurring, a country may decide that the application of anti-
money laundering measures is not necessary, either fully or partially
(2004 AML/CFT Methodology para 23; Glossary to the FATF 40
plus 9 Special Recs.).

Key elements

Does your country implement Art. 4 of Commission Directive
2006/70/EC?

Description and

Analysis

The option provided by Art. 2 (2) of the Directive not to apply this
Directive to certain legal or natural persons carrying out a financial
activity on an occasional or very limited basis has not been used in the
AML/CFT Law. The AML/CFT Law does not provide for such an
exemption.

Conclusion

The option provided under Art. 2 (2) of the Directive has not been used.
As a consequence there was no need to implement Art. 4 of Commission
Directive 2006/70/EC.

Recommendations and
Comments

None.

6. Simplified Customer Due Diligence (CDD)

Art. 11 of the Directive

By way of derogation from the relevant Article the Directive
establishes instances where institutions and persons may not apply
CDD measures. However the obligation to gather sufficient CDD
information remains.

FATF R. 5

Although the general rule is that customers should be subject to the
full range of CDD measures, there are instances where reduced or
simplified measures can be applied.

Key elements

Is there any implementation and application of Art. 3 of Commission
Directive 2006/70/EC which goes beyond the AML/CFT
Methodology 2004 criterion 5.9?

Description and
Analysis

According to Art 30 §§1, 3 and 6 the obliged subjects are exempted from
observing the CDD requirements if the customer is a:

• credit or financial institution located in a State that observes
equivalent AML/CFT requirements (no requirement that they are

222

supervised for compliance with those requirements).

• (domestic) public authority;
and in relation to:

• life insurance policies where the annual premium is not in excess of
€1,000 or a single premium of no more than €2,500;

• complementary pension schemes, provided that there is no surrender
clause and that they cannot be used as collateral for a loan;

• obligatory and complementary pensions and similar schemes that
provide retirement benefits, when the contributions are made through
deductions from the wages and whose rules do not permit the
beneficiaries to transfer their own rights until after the death of the
title holder;

• beneficial owners of pooled accounts managed by foreign notaries or
professionals that conduct similar activities in another State, provided
that they are subject to requirements regarding the prevention and
countering of ML and FT equivalent to those set forth in the
AML/CFT Law;

• electronic money, if no more than €150 can be memorised in the
device, if it is not rechargeable; or, if it is rechargeable, if no more
than €2,500 can be deducted in a legal year, unless €1,000 or more is
reimbursed to the titular account holder in the same legal year.

Those instances are taken from Art. 11 of the Directive. Art. 3 of
Commission Directive 2006/70/EC provides criteria which the above-
mentioned customers and products must meet so that they can be
considered as customers or products representing a low risk of money
laundering or terrorist financing. The criteria of Art. 3 of the
Commission Directive 2006/70/EC are not implemented in the
AML/CFT Law. The AML/CFT Law allows in these instances for
simplified due diligence irrespective of whether those criteria are met or
not.

Differing from the concept of the Directive, the AML/CFT Law
implemented Art. 3 of the Commission Directive in order to provide for
additional instances of simplified due diligence to those mentioned in
Art. 1 1 of the Directive. Pursuant to Art. 30 §7 of the revised AML/CFT
Law the FIA may authorise the obliged subjects not to apply CDD
requirements regarding particular categories of counterparts and
typologies of relationships, services and transactions of low risk of
money laundering or financing of terrorism. Such authorisation has to be
granted pursuant to criteria set out to in the Annex to the revised
AML/CFT Law, which are modelled on Art. 3 of the European
Commission Directive 2006/70/EC.

Based on Art. 3 §1 of the Annex to the revised AML/CFT Law, FIA may
authorise obliged subjects not to apply CDD requirements with respect to

a) public institutions and corporations as well as concessionaries of
public activities that fulfil specific requirements (in particular:
identity is publicly verifiable and certain; activity and accounting
procedures are transparent; subject to the monitoring and control of a
Public Authority established by the domestic law). Difference

223

between public institution/ corporation and public authority
according to Art. 30 §3 of the revised AML/CFT Law remains
unclear.

b) corporations or legal persons that conduct financial activities outside
the scope of Art. 2 § 1 revised AML/CFT Law but which have been
subjected to this law and which fulfil the abovementioned criteria
required for public institutions, (this provision appears not to make
much sense, given that there are no subjects that are not covered by
Art. 2 §1 of the revised AML/CFT Law)

c) companies listed on a regulated stock exchange (there is no express
requirement that the listed company has to be subject to regulatory
disclosure requirements)

d) transactions and related products that fulfil specific requirements (in
particular: transaction or product has a written contractual basis; the
transaction is conducted through an account of the counterpart at a
credit or financial institutions based in a State that imposes
equivalent CDD requirements; the transaction or product are not
anonymous and their nature permits fulfilling the CDD requirements;
the product has a pre-set maximum value (maximum value should be
specified by State/ Authority); etc.)

While assessing whether the above-mentioned instances present a low
risk of ML or FT, the FIA is required to consider carefully whether the
counterpart, transaction or product is particularly susceptible, due to its
nature, to be used for ML or FT. They shall not be presumed to present a
low risk of money laundering or of financing of terrorism if there are no
data or information that furnish sufficient certainty of the low risk.

Rather than providing for simplified due diligence measures, Art. 30 of
Act. CXXVII creates blanket exemptions from the CDD requirements.
These customers and products are exempt from the CDD provisions that
address the key CDD components of identifying and verifying the
customer's identity, identifying the beneficial owner and verifying its
identity, determining the purpose and intended nature of the business
relationship, and conducting ongoing monitoring of the relationship.
Therefore, these are not reduced or simplified CDD measures as
suggested by the essential criteria, but an exemption from any CDD
except in those situations when ML or FT are suspected, or when there
are reasons to believe that the previous verification is unreliable or
insufficient to provide the necessary information. (Art. 30 §5 of the
revised AML/CFT Law).

For both, credit/financial institutions and public authorities the obliged
subjects are required to gather enough information to determine that the
counterpart falls within one of these categories (Art. 30 §4 of the revised
AML/CFT Law). However, there is no further clarification on what
"enough data" means and the provision's scope seems limited to the
process of determining whether the customers qualifies for the
exemption. Furthermore, there is no requirement to gather sufficient
information for the exemptions according to Art. 30 §6 and 7 of the
revised AML/CFT Law.

Conclusion

The implementation and application of Art. 3 of Commission Directive
2006/70/EC goes beyond the AML/CFT Methodology 2004 criterion 5.9

224

in so far as Art. 30 of the revised AML/CFT Law creates blanket
exemptions from the CDD requirements rather than providing for
simplified due diligence measures.

Recommendations and
Comments

Address the exemptions for low-risk customers and products as adopted
from the Directive by clarifying that minimum CDD (i.e. less detailed
CDD) should nevertheless be accomplished.

Politically Exposed Persons (PEPs)

Art. 3 (8), 13 (4) of the

Directive

(see Annex)

The Directive defines PEPs broadly in line with FATF 40 (Art. 3(8)).
It applies enhanced CDD to PEPs residing in another Member State
or third country (Art. 13(4)). Directive 2006/70/EC provides a wider
definition of PEPs (Art. 2) and removal of PEPs after one year of the
PEP ceasing to be entrusted with prominent public functions (Art.
2(4)).

FATF R. 6 and Glossary

Definition similar to Directive but applies to individuals entrusted
with prominent public functions in a foreign country.

Key elements

Does your country implement Art. 2 of Commission Directive
2006/70/EC, in particular Art. 2(4), and does it apply Art. 13(4) of the
Directive?

Description

Analysis

and

Politically exposed persons are defined in Art. 1 §18 of the revised
AML/CFT Law as persons who are or who have been entrusted with
prominent public functions, as well as their immediate family members
and those with whom they publicly maintain a close association. The
revised AML/CFT Law does not distinguish between persons who hold
prominent functions domestically and those holding prominent functions
in another country.

The persons who are or have been entrusted with prominent public
functions are defined in the Annex to the revised AML/CFT Law in line
with Art. 2 (1) of the Commission Directive. Immediate family members
and those with whom they publicly maintain a close association are
defined in line with Art. 2 (2) and (3) of the Commission Directive.

In line with Art. 2 (4) of the Commission Directive, a person no longer
holding prominent public offices for a period of at least one year is not to
be considered as a PEP. However, it is clearly stated in the same
provision that this is without prejudice to the general obligation to apply
enhanced due diligence on the basis of the assessment of the existing risk
(Art. 2 §4 of the Annex to revised AML/CFT Law).

The FATF plenary has considered the one-year limit in the context of an
EU member state's mutual evaluation report, and has concluded that such
a threshold is not a material deficiency when there is a general obligation
to apply enhanced due diligence to customers (including PEPs) who still
present a higher risk of ML or TF regardless of any timeframe. Such an
obligation is provided in Art. 31 (1) of the revised AML/CFT Law.

Art. 31 (5) of the revised AML/CFT Law transposes Art. 13 (4) of the
Directive but does not limit the PEP requirements to persons residing
in a Member state or a third country. The requirements apply
irrespective of the residence of the PEP.

It is a concern that pursuant to Art. 31 §5 of the of the revised
AML/CFT Law (and in line with Art. 13 (4) (a) of the Directive) the
procedure to determine politically exposed persons has to be applied
only to the customer and not to the beneficial owner or to the

225

potential customer.

Conclusion

Art. 2 of Commission Directive 2006/70/EC and in particular Art. 2(4)
Commission Directive have been implemented into the AML/CFT Law.
The PEP requirements are implemented in line with Art. 13(4) of the
Directive but have to be applied irrespective of the residence of the PEP.

Recommendations and
Comments

The requirement to determine politically exposed persons should be
extended to the beneficial owner and the potential customer.

8. Correspondent banking

Art. 13 (3) of the
Directive

For correspondent banking, Art. 13(3) limits the application of
Enhanced Customer Due Diligence (ECDD) to correspondent
banking relationships with institutions from non-EU member
countries.

FATF R. 7

Recommendation 7 includes all jurisdictions.

Key elements

Does your country apply Art. 13(3) of the Directive?

Description and

Analysis

The provisions relating to enhanced CDD for correspondent banking
relationships contained in Art. 31 §4 have to be applied to
correspondent bodies of all foreign states.

Conclusion

Art. 13 (3) of the Directive has not been applied.

Recommendations and
Comments

None.

9. Enhanced Customer Due Diligence (ECDD) and anonymity

Art. 13 (6) of the
Directive

The Directive requires ECDD in case of ML or TF threats that may
arise from products or transactions that might favour anonymity.

FATF R. 8

Financial institutions should pay special attention to any money
laundering threats that may arise from new or developing
technologies that might favour anonymity [.].

Key elements

The scope of Art. 13(6) of the Directive is broader than that of FATF
R. 8, because the Directive focuses on products or transactions
regardless of the use of technology. How are these issues covered in
your legislation?

Description and

Analysis

Pursuant to Art. 2 ter §1 of the revised AML/CFT Law, the obliged
subjects are required to adopt adequate policies, organisation, measures
and procedures to prevent and counter ML and FT, on the basis of the
development of new technologies and of the phenomena of money
laundering and the financing of terrorism.

Furthermore, the obliged parties are required, pursuant to FIA Instruction
No. 1, to take into account technological progress and financial
innovation when preparing effective organisational and computerised
tools in order to guarantee an adequate protective scheme against ML and
FT risks. Furthermore, FIA Instruction No. 1 requires that the staff
training is reviewed regularly and should take into account progresses
made in the fields of technology and financial innovation.

Conclusion

There is no provision requiring ECDD in case of ML or TF threats
that may arise from products or transactions that might favour
anonymity as foreseen under Art. 13 (6) of the Directive.

Recommendations and
Comments

Consider implementing Art. 13 (6) of the Directive.

226

10. Third Party Reliance

Art. 15 of the Directive

The Directive permits reliance on professional, qualified third parties
from EU Member States or third countries for the performance of
CDD, under certain conditions.

FATF R. 9

Allows reliance for CDD performance by third parties but does not
specify particular obliged entities and professions which can qualify
as third parties.

Key elements

What are the rules and procedures for reliance on third parties?
Are there special conditions or categories of persons who can qualify
as third parties?

Description and

Analysis

The AML/CFT Law does not provide for reliance on intermediaries or
other third parties to perform elements of the CDD process or to
introduce business. The CDD requirements described under
Recommendation 5 have to be performed by the obliged subjects
themselves.

Conclusion

Act no. CXXVII/2010 is more stringent than the Directive, given that the
reliance on intermediaries or other third parties to perform elements of
the CDD process is not allowed.

Recommendations and
Comments

None.

11. Auditors, accountants and tax advisors

Art. 2 (l)(3)(a) of the
Directive

CDD and record keeping obligations are applicable to auditors,
external accountants and tax advisors acting in the exercise of their
professional activities.

FATF R. 12

CDD and record keeping obligations

1. do not apply to auditors and tax advisors;

2. apply to accountants when they prepare for or carry out
transactions for their client concerning the following activities:

• buying and selling of real estate;

• managing of client money, securities or other assets;

• management of bank, savings or securities accounts;

• organisation of contributions for the creation, operation or
management of companies;

• creation, operation or management of legal persons or
arrangements, and buying and selling of business entities
(2004 AML/CFT Methodology criterion 12.1(d)).

Key elements

The scope of the Directive is wider than that of the FATF standards
but does not necessarily cover all the activities of accountants as
described by criterion 12.1(d). Please explain the extent of the scope
of CDD and reporting obligations for auditors, external accountants
and tax advisors.

Description and
Analysis

The AML/CFT Law covers accountants and external accounting and
tax consultants. In contrast to the requirements of the Directive,
auditors do not fall under the scope of the AML/CFT Law.

With respect to the activities that are subject to CDD and record
keeping requirements, the AML/CFT Law is linked to the FATF
standard rather than the Directive. According to Art. 2 §1 (b) of the
revised AML/CFT Law accountants, and external accounting or tax

227

consultants are subject to the requirements of the AML/CFT Law,

• when they engage or participate in any financial or real estate
transaction, or

• when they assist someone to plan or execute transactions relating
to:

• buying or selling real estate or business entities;

• managing currency, financial instruments or other funds or
other assets;

• opening or managing banking, savings or securities accounts;
and

• organising the contributions necessary for the creation,
operation or management of corporations or legal persons;

According to the essential criterion they should also be subject to
AML/CFT requirements with respect to the creation, operation or
management of legal persons or arrangements and buying and selling
business entities. However, those activities are not covered by the
revised AML/CFT Law (Art. 2 § 1 b) i. of the revised AML/CFT Law).

Conclusion

CDD and record keeping requirements do not cover all relevant
activities of accountants as described by criterion 12.1(d).

Recommendations and
Comments

The scope of the AML/CFT Law should be extended. Accountants
should also be subject to CDD and record keeping requirements when
they prepare for or carry out transactions for their client related to the
creation, operation or management of legal persons or arrangements and
buying and selling business entities.

12. High Value Dealers

Art. 2(l)(3)e) of the
Directive

The Directive applies to natural and legal persons trading in goods
where payments are made in cash in an amount of EUR 15,000 or
more.

FATF R. 12

The application is limited to those dealing in precious metals and
precious stones.

Key elements

The scope of the Directive is broader. Is the broader approach adopted
in your jurisdiction?

Description and

Analysis

The AML/CFT Law applies to dealers in precious metals or stones, when
they engage in a transaction equal or above €15,000 (Art. 2 §1 letter c) ii.
of the revised AML/CFT Law).

Conclusion

The AML/CFT Law has not adopted the approach of the Directive.

Recommendations and
Comments

None.

13.

Casinos

Art. 10 of the Directive

Member States shall require that all casino customers be identified
and their identity verified if they purchase or exchange gambling

228

chips with a value of EUR 2,000 or more. This is not required if they
are identified at entry.

FATFR. 16

The identity of a customer has to be established and verified when he
or she engages in financial transactions equal to or above EUR 3,000.

Key elements

In what situations do customers of casinos have to be identified?
What is the applicable transaction threshold in your jurisdiction for
identification of financial transactions by casino customers?

Description and

Analysis

According to Art. 1 ter §1 c) of the revised AML/CFT Law it is
prohibited to open casinos.

Conclusion

Given that the operation of casinos is not allowed in the HS/VCS
there are no respective rules contained in the AML/CFT Law.

Recommendations and
Comments

None.

14. Reporting by accountants, auditors, tax advisors, notaries and other
independent legal professionals via a self-regulatory body to the FIU

Art. 23 (1) of the
Directive

This article provides an option for accountants, auditors and tax
advisors, and for notaries and other independent legal professionals to
report through a self-regulatory body, which shall forward STRs to
the FIU promptly and unfiltered.

FATF Recommendations

The FATF Recommendations do not provide for such an option.

Key elements

Does the country make use of the option as provided for by Art. 23
(1) of the Directive?

Description and

Analysis

Pursuant to Art. 34 §1 of the revised AML/CFT Law all obliged subjects
(including the above-mentioned DNFBP) are required to report to the
Financial Intelligence Authority.

Conclusion

No use was made of the option provided by Art. 23 §1 of the Directive.

Recommendations and
Comments

None.

15. Reporting obligations

Arts. 22 and 24 of the
Directive

The Directive requires reporting where an institution knows, suspects, or
has reasonable grounds to suspect money laundering or terrorist
financing (Art. 22). Obliged persons should refrain from carrying out
a transaction knowing or suspecting it to be related to money
laundering or terrorist financing and to report it to the FIU, which can
stop the transaction. If to refrain is impossible or could frustrate an
investigation, obliged persons are required to report to the FIU
immediately afterwards (Art. 24).

FATFR. 13

Imposes a reporting obligation where there is suspicion that funds are
the proceeds of a criminal activity or related to terrorist financing.

Key elements

What triggers a reporting obligation? Does the legal framework
address ex ante reporting (Art. 24 of the Directive)?

Description and

Analysis

Pursuant to Art. 34.1 of the revised AML/CFT Law, the relevant entities
are obliged to inform the FIA, on their own initiative, of any suspicious
transaction, when they know, suspect or have reasons to suspect that the
relevant funds are the proceeds of criminal activities or when ML or FT

229

has been or is being committed or has been attempted.

Art. 35.1 of the revised AML/CFT Law sets the rule of a priori reporting,
prohibiting the reporting entities to carry out operations they consider
suspect, unless they have filed a SAR. Deviating from this rule is only
allowed if it is impossible to abstain from executing the transaction or if
by doing so it would jeopardise an investigation. In those cases the report
must be filed immediately after execution (Art.35.2 of the revised
AML/CFT Law).

As the reporting rule refers to the offence of financing of terrorism, the
concerns raised about the scope of the offence are also relevant in this
context.

Conclusion

Except for the cascading effect of the TF offence deficiencies, the
reporting obligation complies with the EU rules.

Recommendations and
Comments

Full compliance will be achieved once the TF offence has been
properly addressed.

16. Tipping off (1)

Art. 27 of the Directive

Art. 27 provides for an obligation for Member States to protect
employees of reporting institutions from being exposed to threats or
hostile actions.

FATF R. 14

No corresponding requirement (directors, officers and employees
shall be protected by legal provisions from criminal and civil liability
for "tipping off, which is reflected in Art. 26 of the Directive)

Key elements

Is Art. 27 of the Directive implemented in your jurisdiction?

Description and

Analysis

The AML/CFT Law does not provide for protection of employees of
reporting institutions from being exposed to threats or hostile actions.

Conclusion

Art. 27 of the Directive is not implemented in the AML/CFT Law.

Recommendations and
Comments

Consider implementing Art. 27 of the Directive.

17. Tipping off (2)

Art. 28 of the Directive

The prohibition on tipping off is extended to where a money
laundering or terrorist financing investigation is being or may be
carried out. The Directive lays down instances where the prohibition
is lifted.

FATF R. 14

The obligation under R. 14 covers the fact that an STR or related
information is reported or provided to the FIU.

Key elements

Under what circumstances are the tipping off obligations applied?
Are there exceptions?

Description and

Analysis

Art. 36 of the revised AML/CFT Law establishes a prohibition for the
reporting parties, their legal representatives, administrators, directors,
employees, consultants, and collaborators of whatever nature, as well as
anyone else who is aware of it, to disclose to the entitled person or to
third parties the report of suspicious transactions, including correlative
information.

230

In line with Art. 28 of the Directive the prohibition is extended to where a
ML or TF investigation is being or may be carried out.

The AML/CFT Law does not provide for exceptions to the tipping off
obligations.

Conclusion

The tipping-off obligations of the AML/CFT Law cover both, the
instances provided by the FATF Standard and those foreseen by the
Directive. There are no exceptions to the tipping-off obligations.

Recommendations and
Comments

None.

18. Branches and subsidiaries (1)

Art. 34 (2) of the
Directive

The Directive requires credit and financial institutions to communicate
the relevant internal policies and procedures where applicable on CDD,
reporting, record keeping, internal control, risk assessment, risk
management, compliance management and communication to branches
and majority owned subsidiaries in third (non EU) countries.

FATF R. 15 and 22

The obligations under the FATF 40 require a broader and higher standard
but do not provide for the obligations contemplated by Art. 34 (2) of the
EU Directive.

Key elements

Is there an obligation as provided for by Art. 34 (2) of the Directive?

Description and

Analysis

Pursuant to Art. 2 bis of the revised AML/CFT Law the foreign
branches and subsidiaries of the obliged subjects, as well as the
institutions controlled exclusively or jointly, directly or indirectly, by
them, are required to observe the requirements set out in the
AML/CFT Law.

When the requirements in force in the foreign State are not equivalent
with those set out by this law, the branches, subsidiaries or controlled
institutions they are required to observe the requirements set out in
this law, to the extent that the laws of the foreign State permit so.

Conclusion

There is no obligation as provided for by Art. 34 (2) of the Directive.

Recommendations and
Comments

Consider implementing Art. 34 (2) of the Directive.

19. Branches and subsidiaries (2)

Art. 31(3) of the
Directive

The Directive requires that where legislation of a third country does not
permit the application of equivalent AML/CFT measures, credit and
financial institutions should take additional measures to effectively
handle the risk of money laundering and terrorist financing.

FATFR. 22 and 21

Requires financial institutions to inform their competent authorities in
such circumstances.

Key elements

What, if any, additional measures are your financial institutions
obliged to take in circumstances where the legislation of a third
country does not permit the application of equivalent AML/CFT
measures by foreign branches of your financial institutions?

Description and

Analysis

When the requirements in force in the foreign State are not equivalent
with those set out by the AML/CFT Law, Art. bis §3 of the revised

231

AML/CFT Law requires branches, subsidiaries or controlled
institutions to inform the Financial Intelligence Authority.

Conclusion

There is no obligation as provided for by Art. 31 (3) of the Directive.

Recommendations and
Comments

Consider implementing Art. 3 1 (3) of the Directive.

20. Supervisory Bodies

Art. 25 (1) of the
Directive

The Directive imposes an obligation on supervisory bodies to inform
the FIU where, in the course of their work, they encounter facts that
could contribute evidence of money laundering or terrorist financing.

FATF R.

No corresponding obligation.

Key elements

Is Art. 25(1) of the Directive implemented in your jurisdiction?

Description and

Analysis

In the HS/VCS the supervisory functions are assigned to the FIA.
Accordingly, there is no need to impose an obligation to inform the FIU,
where, in the course of their work, they encounter facts that could
contribute evidence of money laundering or terrorist financing.

Conclusion

Given that supervisory functions are assigned to FIA there is no need to
implement Art. 25 (1) of the Directive.

Recommendations and
Comments

21. Systems to respond to competent authorities

Art. 32 of the Directive

The Directive requires credit and financial institutions to have systems in
place that enable them to respond fully and promptly to enquires from the
FIU or other authorities as to whether they maintain, or whether during
the previous five years they have maintained, a business relationship with
a specified natural or legal person.

FATF R.

There is no explicit corresponding requirement but such a
requirement can be broadly inferred from Recommendations 23 and
26 to 32.

Key elements

Are credit and financial institutions required to have such systems in
place and effectively applied?

Description and

Analysis

Pursuant to Art. 33 §5 the obliged subjects are required to adopt record-
keeping mechanisms that make it possible to respond promptly and
effectively to the inquiries of the competent authorities. However, there is
no explicit requirement to have systems in place that enable financial
institutions to respond fully and promptly to enquires from the FIU or
other authorities as to whether they maintain, or whether during the
previous five years they have maintained, a business relationship with a
specified natural or legal person.

Conclusion

Art. 32 of the Directive was not implemented.

Recommendations and
Comments

Consider implementing Art. 32 of the Directive.

22.

Extension to other professions and undertakings

232

Art. 4 of the Directive

The Directive imposes a mandatory obligation on Member States to
extend its provisions to other professionals and categories of
undertakings other than those referred to in Art.2(l) of the Directive,
which engage in activities which are particularly likely to be used for
money laundering or terrorist financing purposes.

FATFR. 20

Requires countries only to consider such extensions.

Key elements

Has your country implemented the mandatory requirement in Art. 4
of the Directive to extend AML/CFT obligations to other
professionals and categories of undertaking which are likely to be
used for money laundering or terrorist financing purposes? Has a risk
assessment been undertaken in this regard?

Description and

Analysis

The AML/CFT obligations have not been extended to other professionals
and categories of undertaking than those referred to by the FATF
standard respectively by Art. 2(1) of the Directive (with the exception of
casinos). It remains unclear whether there are other professionals and
categories of undertakings which are likely to be used for ML or TF
purposes given that a risk assessment has not been undertaken in this
regard.

Conclusion

The mandatory requirement in Art. 4 of the Directive has not been
implemented.

Recommendations and
Comments

HS/VCS authorities should undertake a risk assessment in order to find
out if there are other professionals and categories of undertakings which
are likely to be used for ML and TF purposes. As the case may be, they
should consider implementing Art. 4 of the Directive.

23. Specific provisions concerning equivalent third countries

Art. 11, 16(l)(b),
28(4 ),( 5) of the
Directive

The Directive provides specific provisions concerning countries
which impose requirements equivalent to those laid down in the
Directive (e.g. simplified CDD).

FATFR.

There is no explicit corresponding provision in the FATF 40 plus
9 Recommendations.

Key elements

How, if at all, does your country address the issue of equivalent third
countries?

Description and
Analysis

While the Directive refers to requirements equivalent to those laid down
in the Directive the AML/CFT Law refers to "equivalent requirements to
those set out in the AML/CFT Law". Such references are contained in
various provisions:

• Art. 30 §1 of the revised AML/CFT Law (SDD for financial
institutions);

• Art. 3 para 1 (d) Annex to the revised AML/CFT Law (SDD for
beneficial owner of pooled accounts managed by notaries public or
other legal professionals);

• Art. 31 §2 (b) of the revised AML/CFT Law (confirmatory
certification by a financial institution for non-face-to face customers);

• Art. 6 FIA Regulation (transfers of funds involving States having
equivalent legislative schemes);

233

• Part 2 Section IV FIA Instruction No. 2 (verifications documents;
websites of public organisations and authorities);

• Part 5 Instruction No. 2 (rules of ECDD towards financial institutions
located in States that do not have equivalent regulations).

The States whose regimes are deemed to be equivalent are identified by
the Secretariat of State based on Art. 30 §2 AML/CFT.

The list of equivalent countries, which was drawn up by FIA before the
AML/CFT Law has been revised, is contained in FIA Instruction No. 3 89 .
According to the Instruction the list was drawn up on the basis of the
information available at the international level, and of information taken
from assessment reports of national systems for preventing and
countering money laundering and financing of terrorism, adopted by the
GAFI/FATF, any FSRB, the IMF or the World Bank, as well as other
updated information provided by the States concerned.

Conclusion

HS/VCS has adopted specific provisions concerning countries which
impose requirements equivalent to those of the State.

Recommendations and
Comments

None.

,rd

Annex to Compliance with 3 EU AML/CFT Directive Questionnaire

Article 3 (6) of EU AML/CFT Directive 2005/60/EC (3 rd Directive):

(6) "beneficial owner" means the natural person(s) who ultimately owns or controls the customer
and/or the natural person on whose behalf a transaction or activity is being conducted. The beneficial
owner shall at least include:

(a) in the case of corporate entities:

(i) the natural person(s) who ultimately owns or controls a legal entity through direct or indirect

ownership or control over a sufficient percentage of the shares or voting rights in that legal entity,

including through bearer share holdings, other than a company listed on a regulated market that is

subject to disclosure requirements consistent with Community legislation or subject to equivalent

international standards; a percentage of 25 % plus one share shall be deemed sufficient to meet this

criterion;

(ii) the natural person(s) who otherwise exercises control over the management of a legal entity:

(b) in the case of legal entities, such as foundations, and legal arrangements, such as trusts, which
administer and distribute funds:

(i) where the future beneficiaries have already been determined, the natural person(s) who is the
beneficiary of 25 % or more of the property of a legal arrangement or entity;

(ii) where the individuals that benefit from the legal arrangement or entity have yet to be determined,
the class of persons in whose main interest the legal arrangement or entity is set up or operates;

At the time of the MONEYVAL on-site visit the list included the following states and territories: Member
states of the European Community and the European economic area (Iceland, Liechtenstein and Norway),
Australia, Brazil, Canada, Japan, Hong Kong, India, Republic of Korea, Mexico, Russian Federation, Singapore,
United States of America, Republic of South Africa, Switzerland, Mayotte, New Caledonia, French Polynesia,
Saint-Pierre and Miquelon, Wallis and Futuna, Aruba, Curacao, Sint Maarten, Bonaire, Sint Eustatius, Saba.

234

(iii) the natural person(s) who exercises control over 25 % or more of the property of a legal
arrangement or entity;

Article 3 (8) of the EU AML/CFT Directive 2005/60EC (3 rd Directive):

(8) "politically exposed persons" means natural persons who are or have been entrusted with
prominent public functions and immediate family members, or persons known to be close associates,
of such persons;

Article 2 of Commission Directive 2006/70/EC (Implementation Directive):

Article 2

Politically exposed persons

1. For the purposes of Article 3(8) of Directive 2005/60/EC, "natural persons who are or have been
entrusted with prominent public functions" shall include the following:

(a) heads of State, heads of government, ministers and deputy or assistant ministers;

(b) members of parliaments;

(c) members of supreme courts, of constitutional courts or of other high-level judicial bodies whose
decisions are not subject to further appeal, except in exceptional circumstances;

(d) members of courts of auditors or of the boards of central banks;

(e) ambassadors, charges d'affaires and high-ranking officers in the armed forces;

(f) members of the administrative, management or supervisory bodies of State-owned enterprises.
None of the categories set out in points (a) to (f) of the first subparagraph shall be understood as
covering middle ranking or more junior officials.

The categories set out in points (a) to (e) of the first subparagraph shall, where applicable, include
positions at Community and international level.

2. For the purposes of Article 3(8) of Directive 2005/60/EC, "immediate family members" shall
include the following:

(a) the spouse;

(b) any partner considered by national law as equivalent to the spouse;

(c) the children and their spouses or partners;

(d) the parents.

3. For the purposes of Article 3(8) of Directive 2005/60/EC, "persons known to be close associates"
shall include the following:

(a) any natural person who is known to have joint beneficial ownership of legal entities or legal
arrangements, or any other close business relations, with a person referred to in paragraph 1 ;

(b) any natural person who has sole beneficial ownership of a legal entity or legal arrangement which
is known to have been set up for the benefit de facto of the person referred to in paragraph 1 .

4. Without prejudice to the application, on a risk-sensitive basis, of enhanced customer due diligence
measures, where a person has ceased to be entrusted with a prominent public function within the
meaning of paragraph 1 of this Article for a period of at least one year, institutions and persons
referred to in Article 2(1) of Directive 2005/60/EC shall not be obliged to consider such a person as
politically exposed.

235

VI. LIST OF ACRONYMS AND GLOSSARY OF TERMS USED

Acta Apostolicae Sedis
(Acts of the Apostolic See)

Acta Sanctae Sedis
Additional elements

Ad limina visit

AIF
AML/CFT Law

Amministrazione
Patrimonio della
Apostolica

Annuario Pontifico

Apostolic Letter

Apostolic Nuncio

del
Sede

The official gazette of the Holy See which, since 1909, appears
approximately 12 times a year. It contains all the principal Papal
documents and the documents issued by the Roman congregations, and
notices of ecclesiastical appointments.

A monthly publication founded in 1865. Between 1904 and 1909, when
the Acta Apostilicae Sedis was founded, it had an official character. It
contains the principal documents issued by the Pope, directly or through
the Roman Congregations.

The additional elements are options that can further strengthen the
AML/CFT system and may be desirable. They are derived from non-
mandatory elements in the FATF Recommendations or from Best
Practice and other guidance issued by the FATF, or by international
standard-setters such as the Basel Committee on Banking Supervision.
Although they form part of the overall assessment, they are not
mandatory, and are not assessed for compliance purposes.

The obligation of residential diocesan bishops and certain prelates with
jurisdiction (such as territorial abbots), of visiting every five years the
thresholds of the [tombs of the] Apostles, Saints Peter and Paul, and of
meeting the Pope and the dicasteries of the Roman Curia to report on
the state of their dioceses or prelatures.

Autorita di Informazione Finanzaria - Financial Intelligence Authority.

Refers both to Act of the Vatican City State No. CXXVII, concerning
the prevention and countering of the laundering of proceeds resulting
from criminal activities and financing of terrorism, 30 th December 2010
revised and Decree No. CLIX promulgating amendments and additions
to Law n. CXXVII, On the Prevention and countering of the laundering
of the proceeds of criminal activities and the financing of terrorism, of
30 December 2010 of 25 January 2012.

Administration of the Patrimony of the Apostolic See (APS A).

Pontifical Yearbook.

In this context, 'Apostolic Letters' means documents issued by the
Pope, e.g. bulls and briefs.

A permanent diplomatic representative (head of diplomatic mission) of
the Holy See to a state or international organisation (e.g., the United
Nations), having the rank of an ambassador extraordinary and
plenipotentiary, usually with the ecclesiastical rank of titular
archbishop.

The Nuncio represents in a stable manner the person of the Roman
Pontiff before the Roman Catholic diocesan episcopate in the nation or
region to which he is assigned (can. 363). His principal task is to make
more firm and effective the bonds of unity which exist between the
Holy See and the particular Churches (can. 364).

In those States that maintain diplomatic relations with the Holy See, he

236

Apostolic Palace

APSA

Autorita di Informazione
Finanzaria

Can.

Canonical legal system

Carabinieri

Caritas in Veritate

CCL
CDD
CETS
CFT

Chirograph

Code of Canon Law

Codex Iuris Canonici

is tasked with promoting and fostering relationships between the
Apostolic See and the Authorities of the State (can. 365). Under the
1961 Vienna Convention on Diplomatic Relations, a Papal Nuncio is an
ambassador like those from any other country. However, the Vienna
Convention allows the receiving state to grant seniority of precedence to
the Papal Nuncio over others of ambassadorial rank accredited to the
same country, and may grant the deanship of that country's diplomatic
corps to the Nuncio regardless of seniority.

The official residence of the Pope, which is located in Vatican City, the
Apostolic Palace houses both residential apartments and support offices
of various functions as well as administrative offices not focused on the
life and functions of the Pope himself.

Administration of the Patrimony of the Apostolic See.

Financial Intelligence Authority.

Code of Canon Law clause.

The written policies, issued by the legitimate authority, that guide the
inter-subjective relations in the Church's community.

One of the four branches of the Italian armed forces It is a military
police force entrusted with public security.

Latin for 'Charity in Truth'. It is the third encyclical of Pope Benedict
XVI and his first social encyclical. It was signed on June 29, 2009, and
was published on July 7, 2009. The encyclical is concerned with the
problems of global development and progress towards the common
good. The work is addressed to all strata of global society, with specific
points aimed at political leaders, business leaders, religious leaders,
financiers and aid agencies but the work as a whole is also addressed to
all people of good will. The encyclical contains detailed reflection on
economic and social issues and problems.

Code of Canon Law.

Customer Due Diligence.

Council of Europe Treaty Series.

Combating the financing of terrorism.

A papal document of medieval origin, which has been written in
duplicate, triplicate or very occasionally quadruplicate on a single piece
of parchment, where the Latin word "chirographum" (or equivalent) has
been written across the middle, and then cut through so that both parties
to an agreement could verify the authenticity of their respective copies
by comparing one to the other. The cut itself would often be made to
produce a wavy or serrated edge, in order to further reduce the scope for
forgery, and this practice gave rise to the document description
"indenture", since these edges would be said to be "indented".

The Code of Canon Law represents the principal body of laws and
regulations made by or adopted by ecclesiastical authority, for the
government of the Christian organisation and its members. The current
Code was promulgated on the 25th day of January 1983.

Code of Canon Law.

237

Concordats
Corpus delicti

CTR

Curia Romana

Delicts

Dicasteries

DNFBP
ECB

Egmont Group

Encharged persons
Encyclical Letter

Episcopal see

Episcopalis sedes
Essential criteria

ETS

FATF
FIA

FIU

Flagrante delicto

An agreement between the Holy See and a sovereign state on diplomatic
and religious matters. Legally, a concordat is an international treaty, that
regulates the external activities and the social role of the Church within
a particular State as well as State-Church relations.

Under common law, this refers to the principle that a crime must have
been proven to have occurred before a person can be convicted of
committing that crime. Under civil law it also means the body of the
offence, i.e. the object on which the offence is committed.

Cash Transaction Reports.

Roman Curia.

Offences.

An Italicism sometimes used in English to refer to the Departments of
the Roman Curia.

Designated Non-Financial Businesses and Professions.

European Central Bank.

Forum for FIUs around the world to improve co-operation in the fight
against money laundering and financing of terrorism and to foster the
implementation of domestic programs in this field.

persons entitled to execute a single ad hoc transaction, without a general
proxy.

According to its etymology, an encyclical (from the Greek egkyklios,
kyklos meaning a circle) is nothing more than a circular letter. In
modern times, usage has confined the term almost exclusively to certain
papal documents explicitly addressed to the patriarchs, primates,
archbishops, and bishops of the Universal Church in communion with
the Apostolic See and even to all men of good will. Encyclicals indicate
high Papal priority for an issue at a given time.

The official seat of a bishop. This seat, which is also referred to as the
bishop's cathedra, is placed in the principal church of the bishop's
jurisdiction, which is therefore called the bishop's cathedral. Frequently,
this term is used as a synonym for "dioceses".

Episcopal see; the official seat of a bishop.

Those elements that should be present in order to demonstrate full
compliance with the mandatory elements of each of the FATF
Recommendations

European Treaty Series [since 1.1.2004: CETS = Council of Europe
Treaty Series]

Financial Action Task Force.

Financial Intelligence Authority, the FIU of the Holy See (including the
Vatican City State).

Financial Intelligence Unit.

In flagrante delicto is a legal term used to indicate that a criminal has
been caught in the act of committing an offence. The colloquial "caught
in the act", "caught red-handed", or "caught rapid" are English
equivalents.

238

Guardia di Finanza

Holy See/ Apostolic See

HS
IN

In abstracto
In rem

Inter vivos

IOR

Istituto per le Opere di
Religione

IT

lure gestionis
lure imperii
Ius legationis

Ius officii

Ius sanguinis
Ius soli
Ius tractandi
Lateran Treaty

LEA

Legal persons without
canonical recognition

MEQ

An Italian law enforcement agency under the authority of the Minister
of Economy and Finance responsible for dealing with financial crime
and smuggling.

These terms refer both to the Pope and, unless the contrary is clear from
the nature of things or from the context, to the Secretariat of State, the
Council for the public affairs of the Church, the Congregations, the
Tribunals and the other Institutes of the Roman Curia, which acts in his
name and with his authority, and through which the Pontiff usually
conducts the business of the universal Church (Code of Canon Law
clauses 360-361).

Holy See.

Interpretative Note.

In the abstract.

Latin for "against a thing. " http://en.wikipedia.org/wiki/In rem -
cite note-0#cite note-0

A legal term referring to a transfer or gift made during one's lifetime, as
opposed to a testamentary transfer (a gift that takes effect on death).

Institute for the Works of Religion (Istituto per le Opere di Religione)
Institute for Works of Religion (IOR).

Information Technology.

Commercial or private acts.

By virtue of its sovereignty.

A Latin legal term meaning the capacity to send and receive consuls and
diplomats.

A Latin legal term meaning the right or power of an office. It is invested
to those who have been appointed to fulfil a role, exercise an office or
perform a task for the Holy See or in the Vatican City State to work at
the Vatican, and it is usually revoked upon the termination of their
employment.

Latin for 'right of blood'. It is a social policy by which citizenship is
determined by parentage (not place of birth).

Latin for 'right of soil'. It is a social policy by which citizenship is
determined by place of birth (not parentage).

The capacity of a state to conclude treaties and conduct its own policy
abroad.

The Lateran Treaty is one of the Lateran Pacts of 1929 or Lateran
Accords, three agreements made in 1929 between the Kingdom of Italy
and the Holy See, ratified June 7, 1929, ending the 'Roman Question'.
The Treaty establishes and recognises the full sovereignty of the Holy
See in the Vatican City State.

Law Enforcement Agency.

Legal persons recognised under civil law but without canonical
recognition. (Sometimes referred to as "improper foundations").

Mutual Evaluation Questionnaire.

239

MLA

Mutual Legal Assistance.

Motu Proprio

MOU
NCCT

Nunciature

Nuncio

Original AML/CFT Law

Pastor Bonus

PEP

Peregrinatio
Sedem

ad Petri

Peter's Pence

Pontifical State
Pontifical Yearbook

Pontificial Commission for
Vatican City State

Prefecture for the

Economic Affairs of the
Holy See

Prudential supervision

Questione Romana
Rescript

A document issued by the Pope on his own initiative directed to the
Roman Catholic Church.

Memorandum of Understanding.

Non-cooperative countries and territories.

A top-level diplomatic mission of the Holy See, equivalent to an
embassy.

See "Apostolic nuncio" above.

Law n. CXXVII, On the Prevention and countering of the laundering of
the proceeds of criminal activities and the financing of terrorism, of 30
December 2010 (replaced by Decree No. CLIX).

An Apostolic Constitution promulgated by Pope John Paul II on 28 June
1988. It instituted a number of reforms in the process of running the
central government of the Roman Catholic Church and sets out the roles
of the Secretariat of State, Congregations, Tribunals, Pontifical
Councils, Administrative Services and Pontifical Commissions of the
Roman Curia. It also establishes the norms for the Ad limina visits of
bishops to Rome.

Politically Exposed Persons.

A canonical body of the Holy See, constituted in 1933 for the co-
ordination and assistance of the pilgrims who come to Rome, "ad Petri
sedem" in particular during the jubilee years.

A voluntary payment made to the Roman Catholic Church which began
under the Saxons in England.

The Papal States before 1870.

The annual directory of the Holy See. It lists all the Popes to date and all
officials of the Holy See's departments. It also gives complete lists, with
contact information, of the Cardinals and Catholic bishops throughout
the world, the dioceses (with statistics about each), the departments of
the Roman Curia, the Holy See's diplomatic missions abroad, the
embassies accredited to the Holy See, the headquarters of religious
institutes (again with statistics on each), certain academic institutions,
and other similar information.

The legislative body of the Vatican City State.

An office of the Roman Curia, entrusted with overseeing all the offices
of the Holy See that manage finances.

The supervision and regulation of financial institutions where the
supervising authority seeks to ensure that the customers are protected by
the institution in question being financially sound.

The Roman Question.

A rescript is an administrative act issued in writing by a competent
authority, by which of its very nature a privilege, dispensation or other
favour is granted at someone's request (can. 59§1).

240

Revised AML/CFT Law

Roman Curia

Roman Pontiff;
Supreme Pontiff

Roman Question

Sancta Sedes

SAR

Secretariat of State

Segnalazioni
Sezione Ordinaria
Sezione Straordinaria
Specola Vaticana

SRO

stricto sensu

STRs

Sub judice

sui generis

SWIFT

Una gestione reale

vcs

Decree No. CLIX promulgating amendments and additions to Law n.
CXXVII, On the Prevention and countering of the laundering of the
proceeds of criminal activities and the financing of terrorism, of 30
December 2010.

The complex of Dicasteries and institutes through which the Roman
Pontiff usually conducts the business of the universal Church in the
exercise of his supreme pastoral office for the good and service of the
whole Church and of the particular Churches, (can 360-361). The Curia,
together with the Pope, represents the administrative apparatus of the
Holy See and central governing body of the Catholic Church.

The Bishop of Rome, i.e. the Pope.

A political dispute between the Italian Government and the Papacy from
1870 to 1929.

Holy See/ Apostolic See.

Suspicious activity report.

A dicastery of the Roman Curia. It is headed by the Cardinal Secretary
of State and performs the main political and diplomatic functions of the
Holy See.

Reported cases.

Ordinary Section of APS A.

Extraordinary Section of APSA.

The Vatican Observatory. An astronomical research and educational
institution supported by the Holy See.

Self-Regulatory Organisation.

In the narrow sense.

Suspicious transaction reports.

Under judgement.

Unique, only one of a kind.

Society for Worldwide Interbank Financial Telecommunication.

Effective control and management.

Vatican City State.

241